If you're thinking of claiming your Social Security benefits at the earliest possible age, you're in good company. Many Americans don't wait until full retirement age to start receiving benefits.
While there's nothing wrong with choosing to take benefits earlier than later, it does affect the amount of benefits you'll receive. Though you can start receiving payments at age 62, you'll receive less -- permanently.
And another factor that can significantly reduce the amount you receive? Continuing to work after you start receiving benefits. Here's why working before you hit full retirement age impacts your potential earnings after retirement.
Working Before 66 and Your Comprehensive Financial Plan
If you choose to start taking benefits before you turn 66 and you plan to continue working, the amount of annual Social Security benefits you receive will be reduced. For every $2 you make over $15,480, you'll lose $1 in SS benefits.
The following chart illustrates the impact this reduction of benefits can have over time:
* The graph (above) should only be considered an estimation. Please consult your financial advisor or tax professional for a more accurate figure.
Impact on Your Strategic Financial Planning
As you can see, as annual income increases above $15,480, Social Security benefits plummet. But there's one more aspect to consider; the chart above is based on the assumption that a reduction in Social Security benefits would be spread out equally over your annual allotment of monthly checks.
However, the withholding is actually a bit more dramatic. For instance, say you're 62 and you start receiving Social Security benefits in January of 2014. Your monthly benefit is $600 for an annual total of $7,200, but you also plan to work part-time throughout 2014 and make an annual income of $20,800 -- an income that's over the annual cut-off of $15,480.
For every $2 you earn over the limit -- in this case, $5,320 over the limit -- Social Security withholds $1, for a total of $2,660. Instead of spreading that $2,600 out over the 12 months of 2014, you simply would not receive any payments from January through May, or half the year. In June, you'd start receiving your monthly $600 benefit again.
It's Complicated: Ask a Retirement Plan Advisor
To further complicate matters, albeit with some good news, you will eventually be able to recoup those withheld payments. How? When you hit full retirement age -- 66 or 67 -- your benefits will increase to make up for the months in which your benefits were withheld.
For instance, say you start claiming benefits at age 62 and are eligible to receive $750 per month. You go back to work, make more than the threshold, and 12 months worth of benefits are withheld. When you reach full retirement age, the Social Security administration will recalculate your benefits; you'll end up getting $800 per month.
Even better, say your earnings are so high before age 66 that all of your Social Security benefits are withheld. When you reach full retirement age, you'll be eligible for $1,000 per month. In other words, those withheld benefits aren't lost -- they're just delayed.
Which brings us to an important point: If your earnings are significantly higher than the $15,480 threshold, it makes little sense to start claiming benefits before full retirement age. However, each individual situation is different; speak with a trusted retirement planning advisor to develop the strategy that's best for you.