Vanguard’s latest investor-education guidance warns that filers who claim before Full Retirement Age (FRA) while still working can face three compounding hits: a permanent benefit reduction, a wage-based withholding penalty under the retirement earnings test, and federal taxes on whatever payments survive the first two.
Most Americans understand the first one exists, yet few model all three together before picking a filing date, Vanguard noted.
The Social Security Administration’s (SSA) maximum monthly benefit in 2026 is $2,969 at age 62 and $5,181 at age 70.
That $2,212 monthly gap combines the roughly 30% reduction from filing early with the 24% in delayed retirement credits earned by waiting from FRA to age 70. It does not include the earnings penalty or potential federal tax exposure.
How Vanguard’s 3 penalties shrink a working retiree’s check
The first penalty is an irreversible benefit cut for anyone born in 1960 or later with a FRA of 67, Vanguard explained.
Filing at 62 permanently cuts benefits by 30% compared with FRA, while each year of delay past FRA adds roughly 8% in delayed retirement credits until age 70, SSA confirmed.
The second penalty, the retirement earnings test, applies to anyone who files before the FRA and keeps earning above a set annual ceiling. In 2026, the SSA withholds $1 in benefits for every $2 earned above $24,480 for the year.
Drew Powers, founder of Powers Financial Group, told Newsweek that claiming Social Security early has long-term consequences that many filers underestimate.
<strong>The real danger here is making a short-term decision that can have drastic long-term consequences. Choosing to claim Social Security early means a life-long reduction in benefits, and that may or may not be the best choice for your individual situation</strong>.
The third penalty is federal income tax on benefit income, and many filers overlook it when choosing a claiming age.
When a filer keeps earning wages, combined income often crosses the thresholds where the Internal Revenue Service (IRS) starts taxing those benefit payments, Vanguard noted.
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Schroders survey shows nearly half of Americans plan to file early
Vanguard lays out the costs, yet a large share of Americans still plan to claim benefits well before they reach their FRA. The Schroders 2026 U.S. Retirement Survey found that 45% of non-retired Americans plan to file for benefits before reaching FRA.
Just 10% of 1,500 investors surveyed between March and April 2026 said they would wait until age 70. Most of the respondents understand the cost of filing early, as 69% acknowledged that waiting longer would increase their monthly payments.
Among those claiming before 70, 45% cited the need for regular income, 43% wanted benefits immediately, and 40% feared the program would run out.
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Deb Boyden, head of U.S. defined contribution at Schroders, said the results show participants need more support transitioning from a savings mindset to an income mindset. “Far too many people retire without a clear strategy for making their money last…,” Boyden added.
Joel Eskovitz, senior director of Social Security and savings at the AARP Public Policy Institute, called early claiming a crucial lifetime decision.
Locking in a permanently smaller benefit can be devastating for retirees who lack another reliable source of income, Eskovitz warned.
Nearly half of Americans plan to claim Social Security before full retirement age, despite understanding that waiting increases monthly benefits.
The tax thresholds that working claimers often miss
The combined income formula the IRS uses to tax benefits catches more retirees each year because the thresholds have never been indexed for inflation.
Single filers owe taxes on up to 50% of their benefits once combined income exceeds $25,000, and on 85% of their benefits above $34,000, the IRS Publication 915 confirmed.
For married couples filing jointly, the equivalent thresholds are $32,000 for the 50% tier and $44,000 for the 85% tier.
A single filer who claims at 62 and earns $40,000 in wages typically faces all three penalty layers at once. This is because $40,000 in wages plus half of their Social Security benefits pushes combined income past the $34,000 upper threshold for single filers.
The benefit cut reduces their base check, and the earnings test withholds a share of the payments that remain each month after that reduction.
In addition, the paycheck pushes combined income past $34,000, at which point the IRS taxes up to 85% of surviving benefits.
In the year a worker reaches FRA, the SSA applies a higher earnings threshold of $65,160 and withholds $1 for every $3 earned above it.
Once a recipient crosses their FRA birthday month, the earnings test ends, and the SSA recalculates future payments to credit the months previously withheld.
What early filers still earning a paycheck stand to lose
Retirees who file early and keep working rarely project how the earnings penalty, withholding, and tax exposure compound across retirement, the Schroders survey indicated.
Eskovitz noted that some workers have valid reasons to claim early, such as job loss or health concerns. But early claimants accept a permanently lower monthly benefit and could face financial hardship without other sources of income.
For workers earning more than $24,480 who expect to keep that income after filing, all three penalties Vanguard identifies apply simultaneously.
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