Early Retirement Social Security

Social Security benefits, that are determined on the basis of earnings, can be broadly classified as retirement, disability, dependents and survivors benefits.

Categories of Social Security Benefits

Social Security Retirement Benefits: People who have reached the age of 62 and have worked in a non-governmental job for at least 10 years, are eligible for Social Security retirement benefits provided their services do not come under the category of non-covered employment. Non-covered employment refers to services that are not covered under the Unemployment Insurance Law. The earnings of non-covered employees is not taxable, thus, they are not entitled to unemployment benefits. The amount of Social Security retirement benefits are calculated on the basis of 35 years of income, when a person's earnings were maximum. The chosen 35 years of earnings are adjusted for inflation and the average of the indexed incomes gives the benchmark for the monthly Social Security retirement benefits. In case a person has worked for less than 35 years, the indexed income for the years, when the person was not employed, is taken as zero.

Social Security Disability Benefits: Social Security disability benefits are available to people who have not attained the retirement age but have met the requirements for receiving Social Security and are disabled according to the Social Security program's medical guidelines. Generally, the amount of Social Security disability benefits equal the full retirement benefit. Social Security disability benefits can be classified as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Age is no constraint for claiming Social Security disability benefits.

Social Security Dependent Benefits: The spouse, who may or may not be financially dependent, and the minor or disabled children of a retired or disabled worker, who receives Social Security benefits, are entitled to Social Security dependent benefits.

Social Security Survivors Benefits: The surviving spouse and minor or disabled children of a worker, who qualify for Social Security retirement or disability benefits, are entitled to receive Social Security benefits on the basis of the income of the deceased employee.

Early Retirement Social Security Benefits

The following issues are associated with availing early retirement Social Security benefits:

Eligible individuals are entitled to claim benefits at the age of 62 by filing claims at least three months before the 62nd birthday. However, waiting till one reaches the full retirement age or claiming benefits after the full retirement age (FRA) will result in an increase in the amount of benefits. For people born in the year 1960 and later, the FRA is 67. For people born between 1938 and 1960, the FRA varies between 65 and 67. Although one can claim benefits on reaching the age of 62, one would end up receiving around 20% to 30% less than the amount that one could have received had one waited till the full retirement age. This is because the Social Security Administration encourages people to wait as long as possible. One can claim 100% of the benefits on reaching the FRA. People are also encouraged to wait past full retirement age, preferably until they attain the age of 70, by giving them incentives in the form of increased benefits. A person, who waits past the full retirement age and claims Social Security at the age of 70, can hope to receive 108% of the benefits for each year that he/she delays, until age 70, as delayed retirement credit.

People, whose earnings exceed the Social Security Administration's retirement earnings limit, will stand to lose even more on account of availing early retirement benefits. For instance, for the year 2009, the annual earnings limit as prescribed by the SSA is $14,160. People, whose income is more than the $14,160 limit, will lose $1 dollar for every $2 dollars of income that exceeds the prescribed limit assuming that they have not attained the FRA. Once people reach the FRA, regardless of their annual income, Social Security benefits are received in full.

The filing status (married and filing jointly, unmarried or married and filing separately) and the modified adjusted gross income (MAGI) determine the taxes, if any, that are levied on Social Security benefits. Social Security benefits become taxable if one receives income from other sources, in addition to Social Security benefits, thus making the modified adjusted gross income (MAGI) more than the base amount for one's filing status. Paying taxes, on Social Security benefits, may further reduce the benefits received by people who are still employed and are claiming retirement benefits despite not having reached the full retirement age.

Since Social Security is calculated on the basis of 35 years of earnings, that are adjusted for inflation, people who have worked for less than 35 years have a decided disadvantage since the indexed income for the remaining years is taken as zero. This in turn would reduce the monthly Social Security retirement benefits. Such people may benefit by putting in a few more years of work provided they are healthy and can manage without Social Security payments.