Hammered by inflation, recession fears and doubts about the future of Social Security, a growing number of American workers say they plan to claim their Social Security benefits sooner while staying on the job. Here are the factors driving this trend and the pros and cons of following this lead.
Consider working with a financial advisor to create a retirement plan that matches your goals, risk profile and timeline.
More people are claiming Social Security early
42% of Americans said they plan to file for Social Security before full retirement age while continuing to work, according to a 2022 survey by the Nationwide Retirement Institute — up from 36% in 2021 .
Workers who have paid into the retirement system can claim their Social Security benefits as early as age 62, but the move can result in a monthly benefit check up to 30% lower than the payment they would receive at age full pension, which is between 66 and 67 depending on the year of your birth. By waiting longer to file a claim, a retiree can increase their Social Security payment by 8% each year beyond the full retirement age they wait to file, up to age 70 .
In February 2023, the average monthly Social Security check among all retirees was $1,693.88, according to the agency. Meanwhile, the average check for a 62-year-old retiree this year would be $1,247.40, while the average payout at full retirement age of 67 would be $1,782.
Over a 20-year retirement, the monthly difference of $534.6 would total more than $128,000 in retirement income, not including increases in the cost of living. These adjustments increase benefits by a fixed percentage calculated each year to keep retirement income in line with inflation.
Collecting benefits early is not always a mistake, planners note. Many workers start collecting social security benefits when they are forced into retirement due to company downsizing, age discrimination in hiring, illness or the need to care for a sick family member.
Profitable level
Waiting to collect a higher benefit check later means the recipient foregoes some cash flow. The break-even point – where the total benefits collected at full retirement is greater than all the money that could have been collected by starting early – is usually around age 80, according to financial planners.
Using this year’s average benefit amounts, someone who starts collecting benefits at age 62 would collect a total of more than $254,000 over 17 years before collecting a bit more while waiting to claim the retirement benefit. higher full pension. By 2040, the higher amount of waiting benefits would produce just over $2,000 in additional cash (unadjusted for inflation).
Tax Considerations
Social Security benefits themselves are not taxable, but a downside to receiving Social Security payments early is that many recipients will continue to work, which can make part or even a large part of their benefits taxable. In fact, this tax can apply to anyone receiving benefits who receives additional income.
A single filer receiving Social Security payments who earns more than $25,000 of what the IRS calls “combined income” will be taxed on 50% of their benefits, up to a $34,000 income limit. At that time, the tax applies to 85% of their services. The caps for co-registrants are $32,000 and $44,000 respectively. Combined income is a taxpayer’s adjusted gross income, plus non-taxable interest income from bonds and half of their Social Security benefits.
At the end of the line
The number of workers applying for Social Security in their early 60s is increasing, which can be due to a multitude of reasons. Everyone’s retirement journey is different, so it’s important to calculate your needs and apply your Social Security accordingly. And if you continue to work while receiving benefits, consider estimating your tax penalty.
Advice on retirement planning
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Deciding when to apply for Social Security is only part of planning for retirement. A financial advisor can help you see and understand all of the variables that go into a retirement plan. If you don’t already have a financial advisor, finding one doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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