Social Security serves as a key source of income for millions of retirees, and while your individual benefits are determined based on what you earned during your career, the age at which you first file can affect those payments as well. Eligible seniors actually get an eight-year window that begins at age 62 and ends at age 70 (technically, you're not required to claim benefits at 70, but there's no financial incentive not to). Somewhere in the middle of that window is where you'll find your full retirement age, or FRA, which, depending on your year of birth, is 66, 67, or somewhere in between. Therefore, when we talk about filing for Social Security early, we mean taking benefits prior to reaching FRA.
You should know that the downside of filing for Social Security early is that you'll face a reduction in payments. The extent of that reduction will depend on how many years ahead of FRA you file, but if you're looking at an FRA of 67 and claim benefits at 62, you'll lose about 30% of what you're entitled to. That said, there are still several reasons it makes sense to get at that money sooner rather than later.
1. The future of Social Security is uncertain
You may have heard rumors that Social Security is headed for bankruptcy, but that's far from true. Because the program is funded heavily by payroll taxes, as long as we have a workforce, Social Security can continue to pay beneficiaries.
That said, the program's trust fund, which covers shortfalls when incoming tax revenue isn't enough to keep up with benefits, is expected to run dry as early as 2034. At that point, recipients will likely see their benefits slashed unless Congress steps in with a fix. Therefore, it pays to capitalize on your benefits as early as possible, while Social Security is still capable of paying them in full.
2. You can't predict how long you'll live
The interesting thing about Social Security is that it's designed to pay you the same lifetime benefit regardless of when you first file. The logic is that any reduction you face by claiming benefits early will be offset by a greater number of individual payments. That said, this formula assumes that you'll live an average life expectancy, but if you pass away sooner, you'll lose out on money you could've otherwise collected.
For example, say you're entitled to a $1,500 monthly benefit payment at an FRA of 67. Filing at 62 will lower that benefit to $1,050, but you'll collect 60 more payments. If you live until roughly 78 1/2, you'll wind up with the same total lifetime payout. But if you pass away at age 74, you'll end up about $25,000 ahead by filing early.
Of course, none of us can predict how long we'll live, but if you'd rather not take the chance, then it pays to claim benefits as soon as possible. This especially holds true if your health is poor by the time you reach 62.
3. You'll probably end up needing the money sooner
Maybe you have plans to work until FRA or beyond, and therefore don't expect to need your benefits prior to that point. Before you settle on that line of thinking, consider this: An estimated 60% of workers are forced to retire earlier than planned, and the reasons run the gamut from health issues to employer downsizing. Meanwhile, the median personal savings balance among baby boomers nearing retirement is a mere $17,000. What all of this means is that you might face a scenario where you don't have a steady income, and you need more money than your savings can provide. And it makes much more sense for that shortfall to be filled by Social Security than a credit card or personal loan, assuming you even qualify for one in the first place.
Of course, you'll hear plenty of arguments for filing for Social Security at full retirement age or later. In fact, my esteemed colleague Dan Caplinger makes a compelling one here.
If you read Dan's piece, you'll notice that his case for filing later hinges on certain assumptions: that you have the option to work until full retirement age, and that you have a family to consider. If you're single with no eligible survivors, then you only have to worry about yourself when claiming Social Security. Furthermore, Dan writes that it often makes sense to wait on benefits if you're married because there's a chance that at least one spouse will be working in the years leading up to full retirement age -- and if that's the case, it could trigger taxes on those benefits. But again, if you don't have a spouse, and you're no longer working, that's not something to concern yourself with.
While there are certainly some fair arguments for not jumping the gun on Social Security, there are also plenty of situations where it pays to get at that money as early as possible. The key is to consider your personal financial circumstances when making your decision.
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