3 Big Whammies for Early Social Security

In the FERS retirement classes I teach, many people have plans to start Social Security before they reach their full Social Security Age.

But most of them don’t realize just how much of an impact taking Social Security early will have on their retirement plans.

(We’ll be talking mainly about FERS in this article. CSRS might like to see my webpage on CSRS and Social Security)

The 3 Big Whammies

Taking Social Security before you reach your Full Social Security age (65 – 67) can result in three big whammies you need to know about…

  • Whammy #1) 25% *PERMANENT* Reduction in Benefits
  • Whammy #2) Earnings Test – Working Before Full SS Age Reduces Benefits
  • Whammy #3) Survivor Benefits for Your Spouse Reduced

Let’s take a closer look at each of these whammies, and what they might mean for your retirement…

Whammy #1)
25% *PERMANENT* Reduction in Benefits

Did you know that when you take Social Security at age 62 – that it’s a 25% reduction from what you’d receive if you waited until your full Social Security age?

Think about that, a 25% reduction.

As a side note – when I explain FERS MRA+10 pension rules in the federal retirement classes I teach, that if someone retires under MRA+10 rules at age 57, their pension would be *permanently* reduced by 25% – people get very unhappy. And that’s when we discuss Postponed vs. Deferred FERS Retirement – where you can wait to start your pension and avoid this reduction.

But when we talk about Social Security, somehow the 25% reduction to take Social Security at age 62 doesn’t strike the same chord.

But your fixed income is an important part of your retirement planning. And a 25% reduction is worth taking a hard look at to make sure that you really are making the best choice for your situation.

What is Your Full Social Security Age?

Your Full Social Security Age depends on the year you were born. It ranges between age 65 and 67. For example, if you were born between 1943 – 1954, your Full Social Security Age is 66. For a full list, see this chart from Social Security.

How much of a reduction you’ll take for starting Social Security at age 62 depends on your Full Social Security Age.

If you were born in 1950, which means your Full Social Security Age is 66, you’ll take a 25% reduction to start Social Security at age 62. If you were born in 1960, which means your Full Social Security Age is 67, you’ll take a 30% reduction to start Social Security at age 62.

What if you start Social Security at age 63 instead? Or 64?

The closer you get to your Full Social Security Age, the lower the penalty is. Here’s a chart from Social Security for someone born between 1943 – 1954.

But remember, the reduction is *PERMANENT* So if you start Social Security at age 62 with a 25% reduction – your benefit will not go up at age 63 because you’re closer to your Full Social Security age. You may receive a COLA at age 63 (if they have one that year) – but your benefit does not increase otherwise because of your age.

So choosing what age you start receiving benefits determines the benefits you’ll receive for the rest of your life (and your spouse’s life as we’ll discuss shortly).

“But What About COLA?”

Your Social Security will likely be increased by COLA in retirement – but keep in mind that the average COLA is less than 3% (and in some recent years the COLA was 0%). In 2013, Social Security COLA was 1.7%.

While it’s better to receive a COLA than none at all, it simply can’t make up for the tremendous permanent reduction that comes with starting Social Security early.

Whammy #2)
Earnings Test – Working Before Full SS Age

There is another reduction for starting Social Security early that catches most people by surprise. If you start Social Security early, and you work (even part-time) – there is an extra reduction.

For every $2 you earn above a certain threshold, they will take $1 of your Social Security benefit away. And that threshold is surprisingly low.

In 2013, that threshold is $15,120/year of *gross* income.

So let’s say you started Social Security at age 62, then the next year, you decided to get a part-time job. For easy numbers, let’s say your part-time job earns $20,000/year. $20,000 – $15,120 = $4,880 above the threshold. $4,880 / 2 = $2,440 reduction to your benefits.

Instead of ‘spreading’ this reduction over the year – Social Security withholds entire monthly payments until the reduction is satisfied.

For simple numbers, let’s say you were expecting $1,000/month from Social Security. They would withhold your first three payments of the year. So for January, February and March, you would receive nothing from Social Security. Nothing. Then in April, your checks would start for $1,000/month. You’ll get back the extra they withheld above your limit ($3,000 withheld – $2,440 reduction = $560 extra was withheld) *next year*.

On the up side, when your benefits are withheld – you do get ‘credit’ for them at your Full Social Security Age.

But can you imagine how this can throw a monkey wrench in your plans by causing a major cash-flow crunch? Especially if you didn’t know it was coming.

There’s more to know about the earnings test and how it’s applied. Read more at Social Security’s website on “How Work Affects Your Benefits”.

Whammy #3)
Survivor Benefits for Your Spouse Reduced

When you start Social Security early, your benefit is permanently reduced. This affects what you receive while you’re alive, but it will also affect the benefit your spouse could receive after you pass away.

While you’re alive, both you and your spouse may be eligible for Social Security benefits. If you pass away, your spouse can choose to continue the higher of those benefits. (but remember – they only get to continue one).

An Example: Social Security Survivor Benefits

Let’s say you were receiving $2,000/month in Social Security, and your spouse was receiving $1,200/month.

If one spouse passes away, the other spouse can continue the higher benefit – but the other benefit will stop. So if you pass away, your spouse can choose to continue the higher benefit, in this case the $2,000/month. But the $1,200/month benefit will stop.

Your spouse was used to receiving $3,200/month in Social Security – and now they’ll only be receiving $2,000/month. That’s a 37.5% reduction in Social Security income.

And while their living expenses might go down by a bit – they rarely go down by 37.5%.

If you wait to start Social Security, not only will your benefit be higher while you’re alive, your spouse will be able to continue that higher benefit after you pass away.

Getting the Most of Your Social Security Benefit

If you’re a FERS, understanding Social Security, and how to get the most out of your benefits is an important part of planning your federal retirement.

There are times where it might make sense for you to delay starting Social Security to receive a bigger benefit, even if it means drawing down a portion of your personal savings to make it happen.

But to be clear, it’s not a hard and fast rule that waiting longer is better – and it is possible to ‘wait too long’ where you miss the ‘mark’. It really does depend on your personal financial situation.

For many of the Federal Employees I’ve worked with, it usually makes sense to consider waiting until at least their Full Social Security age (or a bit longer) – but not in every case.

Your personal situation is unique – and what’s best for you may be different.

I’ve taken my experience as a financial planner for Federal Employees, and created a do-it-yourself program you can use to plan your retirement. It’s called FERS Route to Retirement, and I’ve recently added an entire video devoted to helping you understand Social Security and how you can get the most out of your benefits.

© 2016 Micah Shilanski, CFP®. All rights reserved. This article may not be reproduced without express written consent from Micah Shilanski, CFP®.

About the Author

Micah Shilanski is a Certified Financial Planner™ professional who specializes in helping federal employees get the most out of their retirement benefits. Micah helps his clients with tax planning, retirement planning, federal retirement planning, estate planning, and investment advice.

Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.

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