The decision to file for Social Security isn't one to be taken lightly. The reason? Though your benefits are based on your lifetime earnings -- specifically those of your 35 highest earning years -- the age at which you initially claim them can cause them to go up, down, or stay the same.
If you file for benefits at full retirement age, you'll get the precise amount your earnings history entitles you to. But you don't have to file at full retirement age (which, depending on your year of birth, is either 66, 67, or 66 and a certain number of months). Rather, you can file as early as 62 or as late as 70. (In fact, you can delay benefits beyond age 70 if you choose, but there's no financial incentive to do so).
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And make no mistake about it -- most seniors jump at the chance to get benefits as early as they can, making 62 the most popular age to file. The downside, of course, is that filing at 62 -- or any age prior to full retirement age -- means facing an automatic reduction in your monthly payments.
If you file at 62 when your full retirement age is 67, you'll lose about 30% of your benefits. If you file at 65 with that same full retirement age, you'll lose about 13.34% of your benefits. And while that's clearly a negative, here are three good reasons to take benefits early.
1. You need the money
Surprisingly, 60% of workers wind up retiring sooner than planned, and the reasons run the gamut from health issues to job loss. If you don't have the savings to support yourself without those benefits, then it stands to reason that you'd want to claim them as early as possible -- especially if doing so helps you avoid debt later in life.
Consider this: An estimated 42% of Americans have less than $10,000 socked away for retirement. If you're one of them and you're forced to retire early, Social Security might be your only viable fallback option -- even if it means filing for benefits before full retirement age and reducing a major income stream for life.
2. You don't need the money
Many people file for Social Security early out of desperation. But if you're in the complete opposite boat, claiming early also might make sense.
If you've saved well for retirement and therefore don't need your benefits to live on, but want them earlier in life so you can travel or enjoy other hobbies while you're relatively young, then you might as well take them and put them to good use. Of course, this only works if your savings are truly strong enough to support you in the face of whatever reduction your benefits are hit with. But if that's the case, why not collect the money you've earned when you want it?
3. Your health is poor
One lesser-known fact about Social Security is that it's technically designed to pay you the same total lifetime benefit regardless of when you first file. The logic is that, while you'll take a hit on benefits by filing early, you'll also collect more payments, and it will eventually even out.
This formula, however, assumes one key thing -- that you'll live an average lifespan. If your health is poor and you don't expect to live a very long life, then it generally pays to claim your benefits as early as you can.
Imagine you're entitled to a full monthly benefit of $1,500 at a full retirement age of 67. If you file for Social Security at 62, you'll lose $450 a month in benefits, but you'll break even around age 78 1/2 with roughly $209,000 in total payments. This means that if you pass away any time before 78 1/2, you'll come out ahead financially by filing at 62 as opposed to waiting. Therefore, while it's never comfortable to assess your own mortality, doing so could drive you toward a smarter financial decision.
There are plenty of people out there who will tell you that filing for Social Security ahead of full retirement age is a downright awful idea. But there's another side to the story. If you need the money, aren't reliant on those benefits, or have reason to believe you won't live a long life, filing early could end up being a very wise financial move.
