Countless Americans rely on Social Security to stay afloat financially during their senior years. And while your full retirement age -- the age at which you'd collect your full benefit amount -- is based on the year you were born, anyone eligible for Social Security can start collecting it as early as 62. But just because you're allowed to take benefits that early doesn't mean it's a good idea. Here are three reasons to think twice before rushing to snag those benefits as soon as possible.
1. Social Security isn't going away anytime soon
There are a lot of rumors flying around about the future of Social Security, but if you're planning to take benefits as early as possible for fear that you won't otherwise get your money, you're making a big mistake. Yes, it's true that future beneficiaries might see a reduction in benefits if we don't fix the system -- but any major cuts won't happen for almost 20 years, if they even happen at all.
Let's review how Social Security works for a minute. Current workers pay into the system by having their wages taxed, and that money is to used to pay today's beneficiaries. Those who pay Social Security taxes at present will then get to collect their benefits in the future. The problem is that these days, more Americans are retiring than are entering the workforce, and if this pattern continues, incoming Social Security taxes may not be enough to keep up with benefits being paid out. And while the program has trust funds in place to cover its shortfalls, based on current projections, those funds will most likely be depleted by 2034.
Rest assured, however, that the program won't disappear once the trust funds run out; there will still be money coming in from Social Security taxes. Even in a worst-case scenario, tax revenues should be enough to cover 75% of scheduled benefits. What this means is that if you're thinking of claiming your benefits early because you're worried that Social Security will run out of money, don't do it. Your money will still be there if you choose to wait until your full retirement age.
2. Claiming early will lower your benefits -- for the rest of your life
If you're in reasonably good health and don't have a family history of dying young, then it may pay to hold off on benefits until you reach your full retirement age. The reason? Claiming your benefits early will reduce your payments. As the Social Security Administration explains it:
In the case of early retirement, a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.
For example, if your full retirement age is 67 and you opt to start taking Social Security at 62 -- that's 60 months ahead of schedule -- then you'll lower your payments by 30%:
(5/9 of 1% x 36 months) + (5/12 of 1% x 24 months) = 20% + 10% = 30%
Worse yet, that reduction will remain in effect for the rest of your life.
Keep in mind that Social Security is designed to pay you the same lifetime benefit regardless of when you first claim. But Social Security's formulas are based on life expectancies, which not everybody conforms to. Currently, the Social Security Administration estimates that the average 65-year-old man today can expect to reach age 84.3, while the average 65-year-old woman can expect to reach 86. And while you might pass away sooner than expected, there's also a good chance you'll live much longer -- in which case waiting to collect benefits could really pay off.
Let's apply some numbers to illustrate this point. Imagine your full Social Security benefit amount is $2,000, which you'll get if you wait until your full retirement age of 67. If you first file for benefits at age 67 and live until 77, then you'll get a total of $240,000 in lifetime benefits ($2,000 a month x 12 months a year x 10 years). Claim at 62, and you'll reduce that $2,000 to $1,400, but you'll receive more checks -- which means that if you live until 77, then you'll actually come out ahead with a total of $252,000 in lifetime benefits.
But watch what happens if you live until age 87. If you start taking benefits at 62, you'll get a total of $420,000 over your lifetime. Wait until 67, and you'll increase your lifetime payout to $480,000 -- a $60,000 difference. Unless you're in very poor health, jumping the gun on benefits could lower the total amount you ultimately receive.
3. It's not just your benefits that will be impacted
Social Security is designed to provide essential income not just for retirees, but also for their survivors. If you claim your benefits early and slash them as a result, then that reduction will impact your survivor benefits. Imagine, for example, that you pass away and leave your spouse a survivor. At full retirement age, your spouse would then be eligible to collect 100% of whatever your benefit amount happens to be. But if you claim Social Security early and lower that benefit amount, you'll leave your spouse with less money to collect.
For this reason, it's important to consider not just your own health, but your spouse's health as well. If your spouse outlives you by 20 years and doesn't receive the maximum benefit because you claimed early, then he or she might risk running out of money at some point down the line.
Claiming Social Security too early can put your retirement at serious risk. Unless you have a truly compelling reason to claim right away, then you're probably better off waiting on those benefits and enjoying a higher payout for the rest of your life.
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