What Are the Dangers of Taking Social Security Early?

In 2007, millions of people on the leading edge of the baby boom generation reached age 62, the minimum age for collecting Social Security retirement benefits. Since then, millions more baby boomers have reached age 62 and confronted the question of whether to take a reduced retirement benefit at 62, wait until age 66 for their full benefit, or wait until age 70 for an extra benefit. Those opting for early Social Security are potentially endangering their financial health.

Benefit Reduction

As of 2012 and assuming Congress makes no changes, taking your Social Security retirement benefit at age 62 instead of waiting until age 66 locks you into a 25 percent lower monthly benefit for the rest of your life. This is the single-biggest danger from taking benefits early. For example, Social Security’s website calculator shows that if you were born in 1953, earned $75,000 a year and started collecting when you turned 62, you would collect $16,920 annually. But if you waited until you turned age 66, you would collect $23,412 annually, or $6,294 more per year. If you delayed retirement until age 70, you’d get $31,656 annually, or $14,736 more per year than if you started collecting at age 62.

Earnings Limits

If you take your Social Security benefit early but are still working, your already-reduced benefit may be cut even more if you earn too much money. If you wait until full retirement age to take your benefit, there’s no limit on how much you can earn from working. But as of 2012, if you started collecting at age 62 you’d start losing benefits if you earned more than $14,460 annually. You’d lose $1 in benefits for each $2 above the earnings limit. In the year you turned 66, you could earn $38,880 before losing benefits at the rate of $1 in benefits for each $3 above the limit.

Outliving Resources

If you take the reduced Social Security benefit at age 62 and live for a very long time, you run a risk of outliving all your other retirement resources and having only a reduced Social Security benefit to live on. Most retirement programs have a finite resource base. If you live long enough, say to 95 or 100, you may run through the money in your 401(k), IRA or other arrangement. By waiting until age 66 or even age 70 to collect Social Security, you’ll maximize benefits from the one retirement plan that can be expected to keep on paying for as long as you live. And unlike other retirement income streams, Social Security benefits will increase with inflation so the purchasing power of your benefit remains relatively constant.

Spouse Could Suffer

If you earn substantially more than your spouse, taking Social Security early could reduce your spouse’s retirement resources. If you start collecting at 62, your spouse’s survivor benefit when you die will be cut by about 25 percent relative to what it would have been had you waited until full retirement age, based on 2012 benefit rules. Another disadvantage: Married persons at retirement get the higher of their own benefit or 50 percent of their spouse’s benefit. If the higher-earning spouse takes Social Security at age 62, the lower-earning spouse may find half the spouse’s benefit to be less than his or her own benefit. By contrast, if the higher-earning spouse delayed taking benefits until age 66 or 70, the lower-earning spouse could get more money by taking half the higher-earning spouse’s benefit.