Many Americans count down the days until they're eligible to get their hands on their Social Security benefits. The earliest age for workers to file for Social Security is 62, and it's therefore the most popular age to start taking benefits. But there's a downside to going that route, and it's one that millions of Americans inevitably fall victim to.
Age matters with Social Security
To appreciate the problem with claiming Social Security at 62, it's important to understand how the program works. Your benefits are calculated based on how much money you made during the 35 highest-earning years of your career. The higher that number, the greater your base benefit amount will be, up to a certain maximum. That said, the age at which you first file for benefits might cause that number to decrease, increase, or stay the same.
IMAGE SOURCE: GETTY IMAGES.
If you wait until your full retirement age to start taking benefits, you'll get the base amount you're entitled to as determined by your earnings history. Full retirement age is based on your year of birth, as follows:
|
Year of Birth |
Full Retirement Age |
|---|---|
|
1943-1954 |
66 |
|
1955 |
66 and 2 months |
|
1956 |
66 and 4 months |
|
1957 |
66 and 6 months |
|
1958 |
66 and 8 months |
|
1959 |
66 and 10 months |
|
1960 |
67 |
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
This means that if you were born in 1960 and file for benefits at age 67, for example, you'll collect your base amount in full. However, as we learned earlier, you're allowed to start claiming benefits at age 62, and while you may be tempted to do so, you should know that filing early will result in a permanent benefit reduction.
Just how bad of a cut are we talking? You'll lose about 6.67% of your base benefit amount for the first three years you file early, and 5% for each year thereafter. This means that if your full retirement age is 67 but you claim benefits at 62, you'll lower those payments by roughly 30% -- for life.
There's also a flipside you should know about. If you hold off on benefits past full retirement age, you'll get an 8% boost for each year you delay up until age 70. This means that if your full retirement age is 67 and you wait the maximum amount of time, you'll permanently increase your benefits by 24%. And that's not a bad reward for waiting.
Why we're tempted to jump the gun
Now that you understand the problem with claiming Social Security at 62, let's talk about why so many people do so. For the most part, it's because they're forced to retire, they don't have enough savings, and they need the money as soon as possible. It's estimated that a good 60% of Americans end up retiring earlier than planned due to factors such as health issues, job loss, or the need to care for a spouse or dependent. Without adequate savings, these same people typically have no choice but to file for benefits as early as possible.
And let's be clear: Most folks have inadequate savings.
The average retirement savings balance among households aged 56 to 61 is $163,577, and though that might sound like a lot, it's not nearly enough to support someone throughout a retirement that could last 25 years or longer. Furthermore, while $163,577 represents the average savings balance among near-retirees, the median savings balance for that age group is a mere $17,000. In other words, the typical American household's retirement savings fall far short of their future income needs.
To be fair, not everyone who claims Social Security at 62 does so out of desperation. There are some people who save really well during their working years and decide to retire early because they're in a strong enough financial position to do so. Meanwhile, those who find themselves in poor health are often better off filing for benefits as early as possible. That's because Social Security is designed to pay recipients the same total lifetime benefit regardless of when they first file, assuming they live to an average life expectancy. For folks who expect to pass away sooner, filing earlier can result in a higher lifetime payout.
But unless you happen to be age 62 and desperate for money or plagued with health issues, it generally makes sense to wait on Social Security and lock in a higher benefit amount for life. Remember: Not only does filing early reduce your own benefit, but it also reduces the amount your survivors' benefits are based on. That's why it pays to think long and hard before pulling the trigger on Social Security. You have every right to start taking benefits at 62, but it's a move that could end up hurting you, and your family, in the long run.
