Social Security provides an important safety net against abject poverty for American seniors. The typical retiree receives around $1,369 per month from the program -- or around $16,428 per year. With the poverty level currently defined by an income of $12,060 per year for a single person, Social Security does a reasonable job of covering the basic costs of living for most seniors.
If you're approaching the earliest eligibility age of 62 or are anywhere in the window between ages 62 and 70 where you can start your benefits, you may be about ready to start claiming. While it may make sense to claim, you should read on to make sure you understand exactly what you're signing up for by agreeing to take your benefits.
There's a trade-off between time and money when it comes to your Social Security benefit. Image source: Getty Images
The time vs. money trade-off
You will face a clear trade-off between time and money with your Social Security benefit. The younger you start collecting, the lower your per-month benefit will be, but you will receive benefits for a longer period of time. Whether starting early or starting late makes the most sense for you depends in large part on how long you can reasonably expect to live.
In general, the trade-off is designed to attempt to be "actuarially equivalent." That means the typical retiree will receive the same amount over his or her expected lifetime no matter when that person starts collecting. That reduces the risk of choosing "wrong" based on your total lifetime payment amount, but that's not the only key factor you should consider in your decision making.
The big pitfall if you start too young and still work
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One key factor you should consider is the critical date in the range between ages 62 and 70 known as your Full Retirement Age. If you claim at that age, you get exactly what Social Security estimates as your full benefit. That's also the age you can claim while still working without facing a steep penalty. The penalty is steep enough that you'll likely not want to take the one-two punch of both the lower benefit amount and the penalty for claiming early.
If you're younger than your full retirement age and claim your benefits while still drawing a paycheck, the penalty is as steep as $1 for every $2 you earn above $16,920 in the year. That penalty does shrink to $1 for every $3 you earn above $44,880 for time you work before your birthday in the calendar year you reach your full retirement age.
If you were born between 1943 and 1954, your full retirement age is 66. If you were born in 1960 or later, your full retirement age is 67. If you were born between 1955 and 1959, your full retirement age increases two months with each of those years.
You may be able to get a "do over"
Despite that pitfall, the most common age to start collecting Social Security benefits is 62. If you voluntarily retired early, it may very well be the right decision to take your benefits as quickly as feasible. If, on the other hand, you started taking benefits early because you were laid off and needed the cash while you looked for work, that pesky penalty can be problematic if you wind up finding a job.
Fortunately, there is a "do over" provision. One time in your life, within 12 months of first taking your benefits, you can "withdraw" your application, pay back every penny Social Security has paid on your behalf, and reapply later. That way, if you do return to work shortly after claiming benefits early, you can both avoid the penalty and enable your benefit to grow by claiming later.
Your benefits may be taxed
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No matter what your age when you start collecting, there's a chance your Social Security benefits may be subject to income taxes. It depends on your overall combined income level and your tax filing status.
If you file your taxes as an individual and your combined income is between $25,000 and $34,000, half your Social Security benefit may become taxable. For those filing individually with a combined income above $34,000, 85% of your Social Security benefits may become taxable.
If you file your taxes as married filing jointly and your combined income is between $32,000 and $44,000, half your Social Security benefit may become taxable. For those filing jointly with a combined income above $44,000, 85% of your Social Security benefits may become taxable.
If you file your taxes as married filing separately, chances are strong that you'll face taxes on your Social Security benefits.
From Social Security's perspective, your combined income is calculated by adding together your Adjusted Gross Income, your nontaxable interest income, and half your Social Security benefits.
Consider the whole picture when deciding to take Social Security
With the majority of American retirees relying on Social Security for at least half their income, the program clearly plays an important part in most Americans' retirement plans. By considering how your net benefits will change based on when you take them, how you earn your income once taking them, and how much you earn, you can build a plan for claiming them that better meets your needs. Keep that total picture in mind, and you can leverage Social Security to improve your total retirement picture.
