This Neglected Social Security Law Can Cost Retirees
When it comes to claiming Social Security benefits, understanding how the system works and doing the right planning is important.
Getting Social Security checks too early can cost you thousands of dollars in retirement. Here’s what you need to know about Social Security to help ensure you’re not leaving money on the table.
How the law works
A rule that may be overlooked regarding Social Security is that if you apply at age 62 – when you are allowed to start receiving benefits – your benefit amount will be lower than if you wait.
The Social Security Administration states that “if you reach age 62 in 2026, your benefit will be 30% lower than it would have been throughout your entire retirement age of 67.” Also, it will add 8% to your benefit for each full year you delay in receiving Social Security benefits beyond your full retirement age.
Social Security looks at your work history, earnings and age when calculating your award. The maximum benefit in 2026 if you retire at age 62 is $2,969 a month, but $5,181 a month if you retire at age 70.
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Give your benefits time to grow
Taking benefits early can be a costly mistake in retirement. Although delaying benefits translates into higher benefits, there is another reason you may want to work a few more years.
Your lifetime benefits are part of the equation that determines how much you get. Social Security reviews your 35 highest earning years. Working an extra year means you can replace a low-earning year with a high-earning one (assuming you’re making more money now than in your low-earning year). That will effectively increase your lifetime income. You can also use the extra income from working longer to grow your nest egg.
Working a few extra years – even if it means staying at your current job or working part-time – can be very beneficial in the long run.
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Bridge strategy
Some people retire at age 65 when they are eligible for Medicare, but still participate in claiming Social Security to get the maximum benefit. They tap their retirement savings into 401(k)s, individual retirement accounts (IRAs) and similar accounts. This strategy of withdrawing savings and investments between retirement and when you claim Social Security is called a “bridge strategy.”
There’s another reason this plan makes sense for many people: required minimum distributions (RMDs). You are required to start withdrawing money at age 73, and withdrawing money early can help lower your RMDs later in life.
That’s because RMDs are calculated using a percentage of your portfolio. The higher your balance, the higher your RMDs — and the more you may have to pay in taxes when you withdraw from a traditional retirement account.
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