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Probably the most common decision facing new eligible social security recipients is whether or not to file for early benefits. The decision to either consume now or defer to the future is akin to an investment decision. And just as any investment decision requires a “risk-return” analysis, so too does the question of claiming early benefits. There may be more factors involved than just the receipt of a larger or smaller benefit amount. Below is an example of filing for early benefits with related questions and links to other pertinent Social Security areas.
Husband, age 64, plans to retire in a couple of months and wants to begin receiving his Social Security retirement benefits. Wife, age 63, is still working and doesn’t plan to retire until she reaches 66.
Q: Will Husband face reductions in his benefits if he decides to start benefits now at age 64?
Yes. If Husband doesn’t wait until he reaches his Full Retirement Age (FRA) of 66, his reduction from his Primary Insurance Amount (PIA) will be approximately .56% per month (6.7% per year) ¹. For instance, if Husband turns 66 in October of 2019, and he files for early benefits in October of 2017, he would be receiving his benefits 24 months early – a 13.4% reduction in benefits¹.
¹ The reduction formula changes beyond 36 months before FRA (5.0% annual rate, instead of 6.7%)
Q: Could there be penalties if the Husband decides to file early and then go back to part-time or full time employment?
Maybe, it depends on how much money Husband earns each year while he is receiving benefits. In addition to the early filing reduction in benefits, Husband may also be subject to an earnings cap penalty that may reduce his monthly benefit because he continues to work before reaching his full retirement age. Once he reaches his FRA, he can work as much as he wants without penalty.
Q: Other than receiving monthly income, are there any other advantages to Husband's filing early?
There may be situations where the Husband’s early filing could trigger the opportunity for both spouses and dependents to file for “auxiliary” benefits based on Husband’s work record – a decision that could immediately improve monthly cash flow. Another situation that could make early filing attractive is if the individual’s health is an issue and living to his or her life expectancy is doubtful.
Q What are some of the disadvantages to filing early for Husband?
a) Once Husband files for retirement benefits, he’s “locked-in” to that amount for life (you will receive annual Cost of Living Adjustments when provided). However, It may be possible for Husband to switch to a higher spousal or survivor benefit later on depending on his situation.
b) If Husband goes back to work before age 66 (his FRA), he may face an earnings penalty reduction in his benefits (no penalty once Husband reaches 66).
c) In the event Husband predeceases Wife, the amount of available survivor benefit to Wife will be permanently reduced if Husband claims early benefits. The amount available to Wife for survivor benefits is the amount Husband was receiving or entitled to receive. If Husband files early, the survivor benefit is locked-in, and the wife’s benefit at Husband’s death would be the greater of her own retirement benefit or Husband’s survivor benefit.
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