Many people claim their Social Security retirement benefits as soon as possible, at age 62. It's by far the most popular age to claim Social Security, despite most financial advice urging people to delay their benefits as long as possible.
While there are some good reasons to claim your benefits early, a few reasons can be somewhat misguided. Here are three bad reasons to claim Social Security benefits early.
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1. You think you can out-invest the rise in benefits
Every month you delay filing, you get a permanent bump in your monthly retirement benefits. The difference for someone who turned 62 this year between claiming today and claiming in eight years at age 70 is a 77% increase in their monthly checks from delaying. That's on top of the cost-of-living adjustments everyone's entitled to under the program.
Taking the cash flow from Social Security and leaving more money invested in the financial markets in those early days of retirement could provide you with more wealth, but you'll have to produce some very good returns in order to outperform Social Security.
Importantly, you're taking on unneeded risk by drawing on Social Security early to invest in the markets. Delaying Social Security provides a very good return with very low risk. Finding an investment with the same expected level of risk-adjusted returns is practically impossible.
2. You feel like you'd better get what's yours
If you have legitimate reasons to believe your life will be shorter than average (health concerns), then you should probably take your Social Security early. But if you're in good health and have no reason to think your life will end sooner than normal, you shouldn't worry you'll miss out on benefits by delaying Social Security and then passing away early.
Don't bias your present self and live to regret it in the future. If you claim early and outlive your savings, you'll feel much worse than if you'd delayed and passed away earlier than expected. In essence, delaying Social Security is like buying insurance against living a longer-than-expected life.
3. You're afraid the program will have to slash benefits
As things stand today, Social Security will need to slash benefits by 2035 when the trust fund is estimated to run out of money. While Congress may act to find a solution, ensuring everyone can keep their benefits, there's always a possibility you won't get as much as you had anticipated.
Still, it's unlikely you'll benefit from claiming early if benefits are cut across the board. If you can only receive 75% of your original benefits, 75% of a smaller number is still smaller than 75% of a larger number. Even if you get a few years of 100% of your benefits by claiming early, you're taking a permanent cut in benefits long-term. And you're doing so based on the idea that Congress will be unable to find a solution to extend the program with full benefits.
If you're afraid Social Security will have to slash benefits, it behooves you to find a way to save more in your own retirement accounts. With more savings of your own, you'll be in a better position to delay claiming Social Security.
Consider the big picture
Deciding when to file for Social Security is a big part of most retirement plans. As mentioned, there are several good reasons why claiming at 62 may be the best choice for some retirees. But it's important to consider how claiming at 62 versus delaying affects the big picture of your retirement plans. If you're looking to claim early because of any of the above reasons, I encourage you to consider what delaying Social Security would look like for your own retirement plans.
