Social Security is arguably the most important social program in this country. Each month, around 62 million people receive a benefit check, of which more than two out of three are retired workers. Of these retirees, 62% lean on Social Security to account for half of their income. Without this guaranteed monthly stipend, the elderly poverty rate would be considerably higher.
Given the importance placed on Social Security income by retired workers, deciding when to sign up for benefits just might be the most important financial decision you'll ever make.
Retired workers can begin taking benefits at age 62 or any point thereafter, albeit there's a pretty sizable dangling carrot that entices them to wait. For every year an eligible retired worker waits to claim benefits, their payout grows by approximately 8%. This accrual continues up until age 70, meaning someone with the same work and earnings history, as well as birth year, who claims at age 70 can earn up to 76% more per month than someone who claims at age 62. From this perspective, claiming early looks like a pretty dumb move.
Claiming Social Security before full retirement age can make a lot of sense
However, at least 60% of retired workers sign up for benefits prior to reaching their full retirement age -- the age where the Social Security Administration deems you eligible to receive 100% of your monthly benefit, as determined by your birth year. Are these tens of millions of retirees all making a poor decision? Not necessarily. In reality, there are seven reasons why claiming Social Security early (i.e., before reaching full retirement age) can make perfect sense.
1. You're in poor health
Sure, waiting until your full retirement age or beyond could pump up what you'll receive each month from the Social Security Administration. But what if you're not in the best of health? Though the average American lives to nearly 79 years of age, chronic health conditions like diabetes and heart disease have the potential to lower life expectancies. If you have a chronic health condition or serious disease, or if your family history shows that your immediate family members failed to live well into their 70s, then considering an early claim in order to maximize your net lifetime payout might be the smartest thing to do.
2. You have no other sources of income
Interestingly enough, the unemployment rate for elderly workers is actually pretty low, according to the Bureau of Labor Statistics. Nonetheless, that offers no guarantee that a senior out of the workforce will be able to find work if looking. If you're out of the labor force for an extended period of time and have no other form of income, enrolling in Social Security may be the best option.
Best of all, a mulligan exists should you regret your early enrollment and land a well-paying job within a year of receiving benefits. Form SSA-521 allows your request for benefits to be withdrawn, assuming it's filed within 12 months of receiving benefits and you pay back every cent you've received from the Social Security Administration.
3. You're a lower-income spouse
Claiming early might also be the wiser move if you made significantly less than your spouse over your lifetime. The reason? It makes more sense to allow a higher-earning spouse's income to grow at approximately 8% a year, so it'll have a bigger impact on household income beginning a few years down the road. A lower-income spouse claiming early ensures that the household at least generates some monthly income while the larger payout is allowed to grow.
Plus, a lower-earning spouse may have the opportunity to use his or her higher-earning spouse's survivor benefit if he or she passes away first. If the higher-earning spouse waits until their full retirement age before signing up for benefits, and they wind up passing away first, then the lower-earning spouse can max out that survivor benefit, assuming it's higher than what they'd receive based on their own earnings history.
4. You're deeply in debt
Retiring in debt is becoming more common for today's seniors. In order to counter that debt, some may find it prudent to try to double down on their income streams by claiming Social Security benefits early. In some instances, this will work and prove a smart move. However, there is something you'll need to be aware of: the retirement earnings test (RET).
If you enroll for benefits prior to reaching your full retirement age, the Social Security Administration sets income limits that you can earn before it begins withholding benefits. There is no withholding once you've reach full retirement age.
In 2018, seniors who won't reach their full retirement can earn up to $17,040 a year ($1,420 a month) and be exempt from the RET. Meanwhile, beneficiaries receiving benefits who earn more than $17,040 can have $1 in benefits withheld for every $2 in earnings above the limit. If you'll hit your full retirement age in 2018, but have not yet done so, the Social Security Administration can withhold $1 in benefits for every $3 in earnings above $45,360 ($3,780 a month) until your full retirement age is reached.
There is a bright side here: You don't lose the withheld benefits. They're merely paid back in the form of a higher monthly payment once you reach full retirement age.
5. You're wealthy
If you're wealthy and don't plan to in any way rely on Social Security income during retirement, then claiming early can be the smart route to go for two reasons.
First, the monthly income provided by Social Security could act as icing on the cake should you want to travel or pursue various hobbies.
Second, claiming before your full retirement age would mean a permanent reduction in your monthly payout. Reducing your payout might help cut your tax liability with the federal government (yes, Social Security benefits can be taxed, depending on your annual income), as well as within your home state, if it's among the 13 states that currently tax Social Security benefits in some capacity.
6. Your being tax-savvy
Speaking of taxes, claiming early can also be a positive for the average American, not just the rich.
The Social Security Act Amendments of 1983 allowed for the taxation of Social Security benefits. Beneficiaries who are single filers and earn more than $25,000 a year, along with couples filing jointly who earn more than $32,000 a year, can have half of their Social Security income exposed to federal taxation. A second tier was implemented in 1993 that allowed 85% of benefits to be exposed to ordinary income tax rates for single filers earning more than $34,000 and couples over $44,000.
Long story short, the haircut you take by claiming benefits early might save you from having to part ways with any of your Social Security income, especially given that thresholds established in 1983 haven't been adjusted for inflation in 35 years.
7. You're trying to maximize your payouts ahead of Social Security's "Judgment Day"
Last, but not least, claiming early might make sense if you fear Congress' ability to get anything done, which is a perfectly reasonable concern given how little progress has been made in recent years on Social Security.
According to the Social Security Board of Trustees' 2017 report, the program is expected to have exhausted its cash reserves of nearly $3 trillion by the year 2034. This is primarily a result of baby boomers retiring and life expectancies lengthening over decades. The Trustees predict that if Congress fails to find a way to generate more revenue, Social Security benefits may need to be cut by up to 23% on an across-the-board basis to extend payouts through the year 2091. Fearing this cut, taking benefits as soon as possible might be a smart move that maximizes your lifetime benefits.
Ultimately, every claiming decision is personal and unique -- but claiming early does have its advantages.
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