Your lifetime earnings play a big role in determining your monthly Social Security benefits, but the age at which you file for them affects that number as well. If you claim Social Security at full retirement age, you'll get the exact monthly benefit your earnings record 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 somewhere in between. You can delay benefits past that point and boost them by 8% a year in the process up until you turn 70, or you can file as early as age 62. Claiming benefits early reduces them by a certain percentage for each month you file ahead of full retirement age, up to a maximum reduction of 30% if you file at 62 and have a full retirement age of 67.
Despite the drawback of lowered benefits for life, however, 62 remains the most popular age for seniors to file for Social Security. Part of that stems from a forced retirement trend, with an estimated 60% of older workers leaving their jobs sooner than planned. But not everyone who claims benefits at 62 is similarly compelled to do so. For some folks, it's a matter of impatience, or a desire to get their money as quickly as they possibly can.
If you're thinking of signing up for Social Security at 62, know that doing so could be a decision you ultimately regret. Here are three reasons it pays to wait.
1. Retirement will probably cost more than you think
Many folks assume that their expenses will drop drastically once they retire, but when you look at the things you're currently spending money on, you might realize why that line of thinking is flawed. Save for commuting costs and other incidentals related to going to work, most of the expenses you're currently facing will still be on the table in retirement, like auto insurance, food, utilities, and clothing. And even if you manage to pay off your mortgage in time for retirement, that savings might be offset by rising property taxes and increased maintenance and repairs as your home ages.
Furthermore, some of your current expenses might actually go up in retirement, like healthcare, since medical problems tend to manifest as folks age. In fact, data from the Employee Benefit Research Institute released a couple of years back found that nearly half of households spent more money, not less, during their first two years of retirement, while 33% of households spent more during their first six years in retirement.
And there lies the danger of filing for Social Security as early as possible. In doing so, you risk reducing a major income stream for the rest of your life before you're even gotten a chance to see what retirement actually costs you.
2. Longer life expectancies increase your risk of getting shortchanged
Social Security is technically designed to pay you the same lifetime total whether you file early, late, or right at full retirement age -- but that assumes you only live until a certain point. Many seniors today, however, are living longer, which means that if you file for benefits as early as possible, you risk getting less income from Social Security in your lifetime.
Imagine you're entitled to a full monthly benefit of $1,500 at a full retirement age of 67. Filing at 62 will reduce each payment you collect to $1,050, but you'll get more of them so that come age 78 1/2, you'll pretty much break even whether you file early or on time. But if you live until 84, which is around the average life expectancy for today's 65-year-old men, you'll come out roughly $29,000 ahead by filing at 67 rather than jumping the gun at 62. And if you live until age 90, which 25% of today's 65-year-olds are projected to do, you'll come out over $61,000 ahead by filing at 67.
Of course, if your health is poor and you suspect you won't live a very long life, then this advice doesn't apply. But if you think you might live until your mid-80s or beyond, then filing at 62 could mean depriving yourself of a fair amount of income during your senior years.
3. There are so many things you can do with that extra cash
Maybe you've saved pretty well for retirement, and can therefore afford the hit on benefits that comes with filing as early as possible. Even if that's the case, remember that while free time is a luxury during your working years, it's a permanent fixture in retirement. As such, you might find that you can use all the money you can get your hands on for things like leisure and entertainment. And that's why claiming Social Security at 62 is a move you might really regret -- even if you don't need the extra money in your benefits, it could come in very handy at a time when the world is your oyster, and you're eager to enjoy your golden years to the fullest.
Though claiming Social Security at 62 isn't always a terrible idea, for many seniors, it's the wrong move. Think about the ramifications of filing as early as possible before going through with it so that you don't wind up bemoaning your haste after the fact.