From time to time I’m going to write a little about Social Security. This is, or soon will be, an important subject for all baby boomers.
Many people are tempted to take Social Security early, as early as age 62 as a supplement to their current income. Here is the executive summary of this investment tip. Don’t do it, it’s a trick.
There are three bad things that happen if you take Social Security early while you are still working. First, your benefit is reduced for taking it early. Let’s say you are entitled to $2,000 a month at age 66. If you take the benefit at 62, it will be reduced by about 25%, so your benefit will only be $1,500 a month. But then your benefit is also reduced based upon your pay (not on other income such as investments). Let’s say you make $39,000 a year. First there is an exemption amount that is applied, which is roughly $15,000. After that, the benefit is reduced by $1 for every $2 earned. It would then reduce the Social Security payment by another $1,000 a month ($1 reduction per $2 earned on $2,000 a month over the exemption amount). So that fat $2,000 a month Social Security payment is now reduced to $500 a month. Now the additional bad news. In this case, that $500 a month is probably taxable.
This is a complex subject. In this case, it’s not quite as bad as it seems, as the reduced amount now is added back on when you reach full retirement age at 66 or so. Nevertheless, if you’re looking to supplement your wages with Social Security before age 66, it’s probably better to look elsewhere.