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Disadvantage of Taking Social Security Before Full Retirement

Disadvantage of Taking Social Security Before Full Retirement
Kevin Wenke

Kevin Wenke

CFP | CLU | Investing | Insurance | Taxes

The Social Security system is set up so that eligible workers and the beneficiaries of deceased eligible workers can start taking Social Security Benefits as early as age 62; age 60 for a spouse of a deceased worker.  

This can sound like a good idea, but what are the disadvantage of taking Social Security early and how much money will it cost?

Full, or normal retirement age, as far as Social Security is concerned is determined by the year you were born.  This chart shows you that individuals born in 1954 reach full retirement age in 2020 at age 66 and those born in years after this gradually have their retirement age increased until those born after January 1st 1960 reach Normal retirement age when they reach age 67.

Disadvantage of Taking Social Security Before Full Retirement - fig -1

Knowing the age someone turns normal retirement age allows us to figure out how much benefit they will lose by taking it early.  From figure 1. you can see that early recipients lose 6.67% per year in earlier years and in later years 5% is lost.  These losses add to a potential 30% reduction in full retirement benefits.

Disadvantage of Taking Social Security Before Full Retirement- fig -3

Broken down in figure 2 is how much you would lose each month.  It breaks down to 5/9th of a percent for months between ages 62 and 63, 63 and 64 and 64 and 65. After that, you start to only lose 5/12 of one percent.

Disadvantage of Taking Social Security Before Full Retirement - fig-2

As an example, imagine someone born on January 2, 1960 whose full retirement age is 67 years old and would have earned an entitlement of $1,000 per month.  

This person will turn 62 years old in 2022 and if they want to receive benefits early, they could apply for benefits up to 4 months before the 62nd birthday.

Suppose this person waited to apply for the social security retirement benefits until March 1st, a month later than eligible.  With a normal retirement age of 67 this retiree loses 5%, or 6.67% each year as shown in figure 1. Up to that 30% maximum.

$1,000 per month full benefit – 30% = $700 reduced benefit

But, the person in this example was late to apply and started taking benefits one month after eligible and since the retiree was a month late, they get that one month credited back at 5/9th of a percent which adds back $5.50 so your monthly benefit is now $705.50

If you do take benefits early and you plan to continue working you need to understand the Social Security Earnings Test.

The Earnings Test is how Social Security benefits are reduced and thus, creates disadvantage of taking social security earlier than full retirement age while still earning an income.  

If you are considering taking early benefits you may also want to read determining break-even on social security income as well as how social security: the perfect investment hedge.

The fact of the matter is there are many factors to consider when determining when someone should begin their Social Security and each individual recipients circumstances are different.

By the way, do you know, majority of the people does not understand the complexity of social security availing timeline. Perhaps, people often regret their decisions after opting the benefits early or in some cases too late.

Which is why, I have written this book called Overcome the social security confusion You can download the book for free. Just click on the book title and get your free copy now!

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