When should you claim Social Security benefits? This is one of the biggest -- and most important -- questions you'll have to answer as you get older. Unfortunately, many people don't really consider all the info when they make this decision. Instead, many claim at 62 because it's the soonest they're able to get their hands on this source of income.
While claiming at 62 can sometimes make sense, especially if you don't think you'll live for a very long time, there are also lots of circumstances where starting your benefits this early is a bad choice. In fact, here are three key reasons people often claim benefits at 62 that are actually very bad reasons.
1. Because you don't realize your benefits will go up if you wait
In order to be eligible to receive your Primary Insurance Amount (the standard Social Security benefit you're entitled to), you need to wait to claim benefits until full retirement age (FRA). Full retirement age is determined based on your birth year. For anyone who was born after 1960, FRA is 67.
If you retire at 62, you're retiring well before your full retirement age. Unfortunately, this means your monthly Social Security benefit will be reduced. The benefit you receive is reduced by 5/9 of 1% for each month before FRA that you retire. If you retire more than 36 months before FRA, then for each prior month, your benefit is reduced by an additional 5/12 of 1%. This chart shows the devastating impact this can have on Social Security benefits, as retiring at 62 with an FRA of 67 would result in a 30% decline in Social Security income.
Unfortunately, once you've reduced your Social Security benefits by claiming early, you're stuck with your reduced benefit -- you don't bump back up to your standard Primary Insurance Amount after reaching full retirement age. All future cost-of-living adjustments -- or annual raises -- will be based off this reduced benefit.
Reducing Social Security income isn't advisable because those benefits are probably your only source of guaranteed lifetime income. Stanford Center experts recommend waiting until age 70 if you can to claim benefits in order to maximize them. But even if that's too long, waiting at least until full retirement age can help you avoid having your benefits cut by a big percentage.
2. Because you get too sick to work
According to the Center for Retirement Research at Boston College, more than a third of older workers retire sooner than they planned. Among those workers, health shocks are the leading reason for leaving the workforce early. These health shocks include existing health conditions having a bigger impact on the ability to perform work than anticipated or a change in health status.
If you get too sick to work, it may seem like claiming Social Security Retirement benefits is the only way to support yourself. But, you're forgetting about another Social Security benefits program: Social Security Disability Insurance (SSDI). You pay into this program with every paycheck, and you're eligible to claim benefits through it at any point in your career after you've earned enough work credits to qualify. This includes between age 62 and full retirement age.
If you opt for SSDI benefits instead of claiming retirement benefits at 62, you won't face a reduction in benefits that comes from claiming early. You also become eligible for a disability freeze. A disability freeze means any years in which you earned a low income because of your disabling condition won't be counted in the formula used to determine how much your Social Security benefit amount will be.
When you claim SSDI, you can continue receiving disability income until full retirement age, at which time you'll switch over to receiving retirement benefits. The benefits you receive should be higher than if you'd claimed retirement benefits early and had benefits reduced accordingly.
3. Because you believe the rumors that Social Security is going bankrupt
While some retirees claim early because they don't understand how benefits work, others do so because of a big misconception about Social Security: the mistaken belief that benefits are going to run out.
According to a Gallup poll, more than half of Americans doubt they'll get any Social Security benefits at all. If you have doubts about whether benefits will last, it could seem smart to claim your cut as soon as you become eligible.
In reality, however, there's no way Social Security is going bankrupt. The bulk of Social Security benefits are paid out from money coming in from payroll taxes. While there is a trust that covers the shortfall between what payroll taxes bring in and what's owed to beneficiaries, this trust isn't expected to run out of money until 2034, according to the most recent trustees report.
It's unlikely politicians are going to let it run out of money, especially when simple changes can be made, such as increasing the value of wages subject to Social Security taxes. And, even in a worst-case scenario, Social Security could continue to pay around three-quarters of the promised benefits to retired workers.
So, don't take a guaranteed reduction in benefits by claiming early in hopes of avoiding a reduction in benefits that's likely never going to happen.
Make an informed choice about when to claim Social Security
The decision about when to claim Social Security benefits is going to impact your financial security throughout your retirement. Make sure you understand how benefits are calculated and how to maximize your Social Security income before you make your claim.