So, you're turning 62 soon and you're counting the days until you become eligible to receive Social Security benefits. Since 62 is the earliest age at which you can start getting Social Security retirement income, it's one of the most popular ages at which to claim benefits.
But, while many people grab their benefits ASAP (and doing so can seem tempting), there are lots of reasons it's a bad idea to claim benefits at 62. Here are three big issues that may cause you to think twice before collecting Social Security as soon as you're able:
1. Your benefits will be lower for life
Depending upon your year of birth, you have a designated age that's considered your full retirement age (FRA) for Social Security benefits. For anyone born after 1960, FRA is 67.
If you retire before FRA, benefits are reduced by 5/9 of 1% for the first 36 months early, and are reduced by an additional 5/12 of 1% per month if you retire more than three years prior to FRA. If you claim benefits at 62, you could experience a reduction equal to 30% of your total benefit. The reduction is permanent -- you don't just jump up to your standard benefit amount when you hit your FRA. And all your annual cost-of-living adjustments are based off your lower starting benefit.
Because life expectancies are growing, many people live a long time beyond 62 -- so waiting to claim benefits to raise your monthly Social Security income could provide substantially more money over your lifetime. You can do the math to see how long it would take to break even from delaying benefits for several years. Just add up the money missed by waiting to claim, and divide by the extra money you'll get annually due to higher monthly benefits.
As a simplified example, if you missed out on $100,000 by waiting years to claim but received $10,000 in extra annual income from higher benefits, it would take you 10 years to break even. This chart can also help you quickly estimate when you'd reach your break-even point. After that, every extra dollar is money you'd have missed by claiming early.
2. You may spend most of your benefits on healthcare
Even if you claim Social Security at 62, you typically won't be eligible for Medicare coverage until 65. But you'll still want to have health insurance to avoid the risk of financial calamity.
Unfortunately, buying health insurance in your 60s is extremely expensive. This is true whether you've recently left your job and are on COBRA, or whether you buy insurance on the Obamacare exchanges. While you may qualify for subsidies for premiums, availability depends upon income -- and you'll still face high deductibles.
The bottom line is, from age 62 to 65, you're probably going to end up spending a huge portion of your benefits just to keep yourself covered and to get basic care. And, if you decide to try to work to maintain employer-sponsored insurance, your Social Security benefits will be reduced if you earn too much, making it pointless to claim them.
Bottom line: If you have insurance through work and it's at all possible, put off retiring until 65 so you don't end up claiming Social Security only to see most of the money go to paying an insurance company.
3. You could hurt your spouse's financial security
Social Security survivor benefits allow the last surviving spouse to receive the higher of the two benefits each spouse was receiving. If you were the higher earner and retire early, not only will this slash your own benefits, but survivor benefits will also be lower. This could be a big problem for your spouse, who may struggle to cope with the loss of your income if you pass away first.
The death of a surviving spouse is one of two major financial shocks many retirees face (high healthcare costs are the other). And it's most likely to be wives who suffer financial hardship, because women often outlive men and are often paid less. The last surviving spouse needs around 79% of the combined income the couple had to avoid a decline in living standards. But most widows end up with only 62% of that combined income. And unfortunately, one out of four women who outlive their husbands have no more than 55% of the combined income the couple had, which is a recipe for financial disaster.
You don't want to cut your spouse's income by up to 30% because you've claimed benefits at 62 and have had your benefits reduced because of it.
Make the right claiming choice for you
While there are clearly big reasons why it can be dumb to claim Social Security at 62, there are also counterarguments to consider and some circumstances in which claiming early does make sense.
Ultimately, the only way to decide when you should claim benefits is to evaluate how your choice will affect your personal financial situation. Just make sure you know all of the facts about how your benefits are determined -- and about how claiming early or late impacts them -- so you can make a fully informed choice.
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