What does it cost to file early for Social Security benefits?

We’ve all probably read that most people file and start taking Social Security at age 62. We’ve also read that it’s a good idea to claim at 62. And for every message that it’s a good idea, there’s another saying it’s a bad idea.

I identify four or five ideas here to help you define the cost of filing early. You want to make the best informed decision possible if you haven’t already reached age 62. And if you have already claimed and you’re within 12 months of your sign up date, you can still change your mind.

The first is benefit reductions. If you file before you reach your Full Retirement Age (FRA), there is a provision in the rules that if you make more than X amount of money, a certain percentage of your monthly benefit will be withheld from you, even to the point where you no longer get a monthly check.

Before that fact truly alarms you, know that this reduction in benefits is temporary. What they don’t send goes back into the pot so that when you have less earned income, the amount not sent gets included in the new calculations for what you get every month.

Then there are income taxes. If you make a certain amount of money, some of your SS benefit is included in your taxable income. Some SS income may be taxable income all the way to 115. It’s just that once you reach your FRA, you can earn as much as you like and there won’t be any held back. Making lots of money in your 60’s might put you in a higher tax bracket.

The next idea is that once you file early, and continue to have earned income, none of that new earned income goes into the calculation of your average for the 35 highest earnings years. Chances are what you earn at 64 may be far higher than what you earned at age 30. So you’re not only committed to a smaller amount for life, but there’s no way to increase it.

Obviously you can’t accurately define a ‘cost’ for that but it’s there. You’ll pay for it every month for the rest of your life.

The age at which you file and claim benefits defines the age where the lookback for 35 years ends. From that point forward, you benefit levels are locked in. Since what you get is determined actuarially, which simply means how long you are likely to live statistically, the total lifetime benefit is more or less fixed. So claiming early means you get a smaller check for a longer period of time instead of a larger check for a shorter period of time.

Two critical variables to also consider. One is whether or not you have a spouse and you die first. If your monthly benefit is the larger of the two at the time of your death, signing up sooner rather than later for your benefit consigns them to a smaller spousal benefit for the remainder of their life.

The last critical variable is the state of your health. If your health is bad, and there’s a good chance you’ll die sooner rather than later, taking the money now might mean a greater total lifetime benefit. For example, if your benefit at 62 is $1,000 a month but you wait until 66 to file a claim, you’ll have forgone $48,000 dollars, everything else being equal. Now, compare the difference between that $1,000 per month with the possible $1,500 at 66 and figure out how long you have to live before you catch up with the $48,000 you didn’t get by waiting.

None of this will stand up to an audit. I’m just trying to help you make a more informed decision before you commit yourself. Be sure to comment or send a message if you are still confused. BTW, there is a whole module in the VIP Course devoted to Social Security issues.