Many people have reduced work hours, began working from home, or have been laid off because of the Covid-19 pandemic. Some individuals who were approaching their retirement years are now considering if they can retire earlier than planned. This is leading people to question when they can or should begin collecting Social Security.
To collect Social Security, you need to have earned 40 credits, the equivalent of 10 years of work. When you work and pay Social Security taxes, you earn credits towards your Social Security benefits. If you stop working before you have earned enough credits to qualify for benefits, the credits you have earned remain on your Social Security record. You are not eligible to receive any benefits, however. If you return to the workforce, the credits you earn will be added to your previous credits. The credits do not have to be earned continuously; you need 40 credits to be eligible to receive payments.
The amount of Social Security you will receive depends on your earnings throughout your life and the age you begin collecting. The amount calculated uses the 35 years of highest earnings. If you did not work 35 years, a zero would be included for each year to get to the factor of 35 years.
Full retirement age depends on the year you were born. For those born between 1938 and 1942, there is a gradual increase from age 65 to age 66. If you were born between 1943 and 1954, your full retirement age is 66. For those born in 1955 through 1959, there is a gradual increase in the full retirement age from 66 to age 67. Anyone born in 1960 or later full retirement age is 67 years.
The earliest someone can collect Social Security benefits is age 62. If you begin collecting your Social Security benefits before your full retirement age, your benefits will be permanently reduced. There is a percentage reduction depending on how many months between full retirement age and the age you start collecting. It could be a difference of up to 30% if your full retirement age is 67 and you elect to collect at 62. Your benefit amount is reduced for life, not just until you reach full retirement age.
For example, Laura decides to collect her Social Security benefits at age 62. Laura’s full retirement age is 66 and 2 months, and her benefits would be $2,000 per month. By collecting early at age 62 Laura has reduced her monthly benefit from $2,000 to $1,416 (2,000 * 29.2% = $584. $2,000 – $584 – $1,416) Laura will give up more than $7,000 a year by collecting her Social Security benefits early.
At full retirement age, you are eligible to get the full amount of your benefits. You can elect to delay collecting up to age 70. If you delay, your benefits will increase by 8% per year from your full retirement age until you begin collecting your Social Security benefits. The percentage is calculated as ¾% a month, so even delaying a few months past your full retirement age will get you a slightly increased benefit amount.
For example, Dave’s full retirement age is 66, and his benefit at that age is $1,500 per month. Dave could collect at 67, and his benefits would be $1,620 per month ($1,500 * 8%). If Dave decided to wait until age 68, his benefit amount would be $1,749.60 ($1,620 * 8%). Waiting until age 69 would increase Dave’s monthly benefit to $1,889.57 ($1,749.60 * 8%). Finally, at age 70 Dave’s monthly benefit would be $2,040.74 ($1,889.57 * 8%). By delaying collecting his Social Security benefits until age 70, Dave will collect almost $6,500 more per year in Social Security benefits than if he collected at full retirement age.
The annual cost of living increases further magnifies the benefit reduction from collecting early before full retirement age or delaying after full retirement age. Each year, those receiving Social Security receive an increase in benefits to reflect the impact of inflation. For the 2021 year, that increase was 1.3%. Generally, the increases each year average between 1% and 2%.
If Laura collected at 62, her reduced benefit of $1,416 would have increased $18.41 monthly ($1,416 * 1.3%). If she had waited and collected her full retirement benefit of $2,000, her monthly increase would have been $26 ($2,000 * 1.3%). Over time this can mean hundreds of thousands of dollars difference in what you collect over a lifetime.
David delaying his benefits means his annual cost of living increase would be calculated on a larger benefit. His $1,620 benefit would have been increased by $21.06 ($1620 * 1.3%). If he delayed collecting, the 1.3% cost of living would now be based on the $1,889.57 for a monthly increase of $24.56 ($1889.57 * 1.3%). His benefit would increase for the cost of living increases each year in addition to the 8% for delaying. His age 70 benefit would be higher than the $1,889.57.
When you collect your Social Security benefits before reaching full retirement age and continue to work, your Social Security benefits will be reduced if you earn above the earnings threshold. In 2021, an individual can earn up to $18,960 without impacting their benefits. If you exceed the $18,960, Social Security will withhold $1 in benefits for every $2 of earnings above the threshold. This earnings limit remains in place until you reach full retirement age and increases slightly each year.
In the year of full retirement age, you can earn up to $50,520 before benefits are reduced. Your benefit will be reduced by $1 for every $3 of earnings above $50,520. Any earnings in the month of or after you reach your full retirement age do not count toward the retirement test. Once you reach your full retirement age, your earnings will not reduce your benefit.
Once you decide to begin collecting your Social Security benefits at any age, you need to look at the taxability of your Social Security benefits. Up to 85% of your benefits could be taxable at the federal level. Most states do not tax Social Security benefits, but it does vary from state to state. For more information on the taxability of your Social Security benefits, please see the blog post from May 19, 2020, titled “Are Social Security benefits taxable”?