Drawbacks of Taking Social Security Early

I'm deciding whether to take Social Security at age 62 or at 66. I would continue to work, but only part time. How much would that affect my benefits?

It depends on how much you earn. Normally, if you take Social Security benefits at age 62, your benefits will be reduced by up to 25% for the rest of your life (see this chart at the Social Security Web site for specifics), although you will start to receive benefit checks four years earlier than if you waited until age 66.

But your benefits may be reduced even further if you take benefits early and continue to work. If you earn more than $12,960 in 2007, you'll forfeit $1 in benefits for every $2 you make over the limit. If you expect to earn $25,000 this year, that would put you $12,040 over the limit and cause you to lose $6,020 in benefits ($1 for every $2 in earnings above $12,960).

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But those benefits are not lost forever. Claiming benefits before your normal retirement age results in a lifetime reduction in benefits, based on the number of months you receive benefits early. But if you lose six months' worth of benefits to the earnings test, for example, then your future benefits would be recomputed -- and increased -- to account for the fact that you didn't get them six months early. In that case, your benefits would be calculated as if you started taking them at age 62 and six months.

You don't need to worry about working after you reach your full retirement age, which is age 66 for people born from 1943 to 1954 (see the Social Security Administration's chart for specifics). Then, you can continue to work without losing any Social Security benefits -- no matter how much you earn.

To estimate your benefit amounts at several ages, and the break-even point for waiting, see the Retirement Benefits calculators at SocialSecurity.gov.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.