You're eligible for Social Security as soon as you turn 62, and many people can't wait until they reach this age to sign up. But starting your benefits this early permanently reduces the size of your checks. If you live into your late 80s or beyond, there's a good chance that starting early costs you tens or hundreds of thousands of dollars in lost benefits compared to delaying benefits until your checks are larger.
If you want the standard benefit you're entitled to based on your work history, you must wait to claim benefits until your full retirement age (FRA). This is 66 or 67, depending on your birth year. Every month you claim benefits before this age reduces your checks, and if you begin right away at 62, you'll only get 70% of your scheduled benefit per check if your FRA is 67, or 75% if your FRA is 66. Delaying benefits increases the size of your checks every month until you reach the maximum benefit at 70. This is 124% of your scheduled benefit per check if your FRA is 67, or 132% if your FRA is 66.
Delaying benefits makes the most sense if you think you'll live long and you're able to fund your retirement on your own until your FRA or beyond. But if you have a terminal illness or you need Social Security to cover your bills, starting earlier could be the smarter play.
There are two major ways you can lose some of your benefits back to the government: taxes and the Social Security Earnings Test. If you're claiming Social Security and your annual income is over a certain amount, which depends on your tax filing status, you could owe taxes on up to 85% of your benefits. If you're interested in learning more about how the government taxes Social Security benefits, here's a brief overview. Note this formula only applies to the federal government. Some state governments also impose Social Security benefit taxes, but each has its own rules.
You may not be able to avoid Social Security benefit taxes entirely, but if you're still working and your income is pushing you into a higher tax bracket, consider waiting until you're fully retired and your income is lower. This could help you avoid benefit taxes or reduce the amount of your benefits the government can tax.
The other way you can lose benefits is if you're under your FRA and still working. In that case, your income becomes subject to the Social Security Earnings Test. If you'll be under your FRA for all of 2020, the government takes $1 for every $2 you earn over $18,240. If you'll reach your FRA in 2020, it'll take $1 for every $3 you earn over $48,600 if you reach this amount before your birthday.
This money isn't lost forever. When you reach your FRA, the government recalculates your benefit to include the amount it withheld, so your checks will be larger after this point. But rather than dealing with all of that, you may prefer to delay Social Security until you've retired or until you reach your FRA and are eligible for even larger checks.
You're not always the only one claiming Social Security on your work record. A stay-at-home spouse or your minor child may also qualify for benefits based on your work history, once you begin claiming. But the date you decide to begin Social Security can affect their benefits as well as your own. For example, starting Social Security under your FRA permanently reduces your spouse's benefit as well as your own.
If there are others in your household who might claim Social Security benefits on your work record, talk through your decision with them as well and make sure you're all comfortable with it. Coordinating benefits with your family can help you maximize your household benefits, and that can lead to more money in the long run.
Thinking about the three questions above is a great starting point when deciding when you should claim Social Security. If you're not ready to claim yet, you can always set a tentative starting date and review your decision as it gets closer.