As an American taxpayer, you pay FICA or self-employment taxes. When you pay these taxes, you accumulate retirement credits. You can earn up to four credits per year, and most working people do, because the earning requirements are quite modest. Once you have at least 40 credits, you will qualify for Social Security and Medicare when you get older.
If you’re not yet receiving Social Security, your age of eligibility will depend upon your birth year. People who were born between 1943 and 1954 become eligible at the age of 66.
For some reason, the eligibility age then goes up by two months per year, so someone born in 1955 would become eligible two months after his or her 66th birthday. Someone born the following year would become eligible at the age of 66 and four months, and so on up until 1960. People who were born in 1960 and after become eligible for a full benefit at the age of 67.
You have options when it comes to the submission of your application for Social Security benefits. If you want to, you can apply for an early benefit when you are as young as 62 years of age.
This can sound like a great idea. You will probably still be working when you are 62, and if you accept an early benefit, you can save that money for when you actually retire, right?
In reality, things are not quite that simple. You can only earn $15,720 per year in a penalty-free manner if you are receiving an early Social Security benefit. You would be penalized by one dollar for every two dollars that you earn that is in excess of this amount.
If you work full time, the penalty would shave down your benefit considerably, but that’s not the only drawback. When you take an early benefit, it is a reduced benefit. The precise amount of the reduction would depend on your birth year, but it would be somewhere between 25 percent and 30 percent less than your full benefit amount.
On the other hand, if you wait until you are eligible for your full benefit, if you continue to work, you can earn unlimited income without experiencing a reduction in your benefit.
You can also decide to delay the submission of your application beyond your age of full eligibility. If you go this route, you would receive an increased benefit.
The timing issue with regard to Social Security will depend upon the circumstances. It can seem as though an early benefit would shortchange you, but under some circumstances, it can make sense.