Americans eligible for Social Security payments may begin collecting them at age 62, even if they are still working. However, monthly payments will be less than if they collected Social Security later, and if work-related income exceeds a certain cap, Social Security payments will be further reduced. There are some good reasons to start collecting Social Security at a younger age, even with the penalties.
Social Security Age and Work Restrictions
Until you reach full retirement age (66, for those born in 1954 or earlier), your benefits will be reduced $1 for every $2 you make in a year over a specified threshold. In 2011, this threshold was $14,160. The reduction is achieved by withholding all Social Security benefits starting in January until enough benefits have been withheld to cover the total annual reduction. At full retirement age, you will be allowed full Social Security benefits, no matter how much you earn.
Withheld Benefits Are Not Lost
When you file for early Social Security benefits, you will receive a lower monthly payment than if you filed when you were older. However, once you reach full retirement age, your Social Security benefits will be redetermined. At that point, benefits withheld between ages 62 and 66 will be added into your later payments, increasing your monthly benefit once again. If you had a high-earning year during this time period that would have increased your benefits, this is also taken into consideration during the redetermination.
If you are retiring in the middle of a calendar year and taking Social Security payments from that point forward, your benefits are calculated as if your retirement month was the first month of the year. In other words, no matter how much you earned prior to that month, only the retirement month and subsequent months will be counted when determining any Social Security payment reductions.
If you are laid off or for other reasons find yourself working without adequate income at the age of 62, you may have to start collecting Social Security early. In this case, it is to your advantage to continue working as much as you can despite reduced payments, since reductions will be returned to your account and your Social Security payments will be refigured at age 66. Married filers should consider having the lower-earning spouse file at age 62, but delay the higher-earning spouse filing for as long as possible. If you are in poor health, however, it may be more to your advantage to file early regardless. It is definitely to your advantage to speak with a Social Security specialist when you approach 62 years of age in order to consider your different options.
The Repayment Option
Prior to December 8, 2010, the Social Security Administration allowed retires to collect Social Security payments from age 62 forward, then pay the entire sum received when they reached the age of 70. They would then have their benefits refigured as if they were claiming Social Security late, in effect taking Social Security payments prior to that point as a no-interest loan. This option has been revised. Now Social Security filers may change their minds and repay the SSA one time only up to 12 months after beginning to receive payments; after this, they must remain in the system.