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3 Dangers of Taking Social Security Early

Millions of Americans are just waiting to turn 62 so they can begin claiming Social Security benefits. Receiving monthly checks might make you feel wealthy, but starting benefits as soon as you're eligible could hurt you in ways you hadn't anticipated. Before you decide, consider the following drawbacks.

1. You're permanently reducing your benefits

The age you begin taking Social Security plays a big part in how much you receive in benefits. The Social Security Administration (SSA) calculates how much you're entitled to at your full retirement age (FRA) -- from 66 to 67 for most workers -- by totaling up your earnings from your 35 highest-earning years adjusted for inflation and dividing by 420 (the number of months in 35 years). This result is your average indexed monthly earnings (AIME).

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You can start benefits before reaching your FRA, but then you get less per check to account for the extra months you're receiving benefits. If you begin right away at 62, you'll only get 70% of your scheduled benefit with a FRA of 67 or 75% with an FRA of 66. Over a lifetime, this reduction could cost you tens of thousands or even hundreds of thousands of dollars.

Consider recipients entitled to a $1,000 monthly benefit at 67. If they begin benefits at 62, they'll only get $700 per check. Assuming they live to 90, they'll receive $235,200 in benefits starting at 62. Waiting until 67 means five fewer years of claiming benefits, but because each check is larger, they'd end up with $276,000 overall. That's a difference of nearly $41,000, and this amount could be even greater if they were to live longer or were entitled to a larger Social Security benefit.

If you want to maximize your lifetime benefit, you should delay Social Security at least until your FRA -- or up until 70 if you can afford to. This is when you're entitled to the maximum of 124% of your scheduled benefit if your FRA is 67 or 132% if your FRA is 66.

2. You might get smaller checks if you're working and claiming benefits at the same time

Working and claiming Social Security isn't an issue once you reach your FRA, but if you are claiming benefits before this age and earning a substantial income, the government will take some money from each of your checks.

If you'll be under your FRA for all of 2020, the government takes $1 for every $2 you earn above $18,240. If you'll reach your FRA in 2020, the government takes $1 for every $3 you earn over $48,600 if you hit this amount before your birthday. Once you reach your FRA, you can earn as much as you want and the SSA won't withhold anything from your checks.

Losing money out of every check doesn't sound like a good thing and it could affect your budget if you'd counted on receiving larger checks. But the good news is those lost dollars aren't gone forever. Once you reach your FRA, the SSA recalculates your benefit amount to include the dollars it withheld so your future checks will be larger.

3. You could owe taxes on your benefits if your income is too high

Owing taxes on your Social Security benefits is also a risk for those who start taking benefits as soon as they're eligible. Many people are still working at 62, and those who are retired are often still active and may want to travel or make big-ticket purchases. The trouble with this is that if your income, including any withdrawals from tax-deferred retirement accounts, is too high, the government could tax some of your Social Security benefits, so you end up losing money you could have kept if you'd waited to begin benefits until your later years when your income decreases.

You could owe taxes on up to 50% of your Social Security benefits if your combined income -- that is, your adjusted gross income (AGI) plus any nontaxable interest and half of your Social Security benefits -- exceeds $25,000 for an individual or $32,000 for a married couple. Individuals with a combined income greater than $34,000 and married couples with a combined income greater than $44,000 could owe taxes on up to 85% of their benefits. Some states tax Social Security benefits as well.

This risk doesn't go away once you reach your FRA, but you're less likely to encounter this problem as you get older because people tend to spend less money in the later years of their retirement. If you plan to be active and spend a lot of money in your early 60s, you're better off delaying benefits until your FRA or beyond, unless you need them to cover your living expenses.

How to choose the best age to start Social Security benefits

Starting benefits at 62 isn't always a bad choice. If you don't expect to live a long life, it makes sense to start claiming as soon as you're able because you might not get any benefits at all if you wait. You might also need to begin Social Security early if you can't afford to cover your basic living expenses without it.

Delaying benefits until your FRA or beyond is typically the better choice if you're trying to maximize your lifetime benefit and avoid having money withheld from your checks. You can figure out which starting age will give you the most benefits by multiplying your estimated monthly checks by 12 to get your estimated annual benefit and then multiplying this by the number of years you expect to receive benefits. Create a my Social Security account to estimate the size of your checks at 62, at your FRA, and at 70. Use this information to make an educated decision about the best age for you to begin Social Security.

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