Though your Social Security benefits are based on your earnings history, the age you claim them at will dictate how much money you ultimately collect each month. If you file for Social Security at full retirement age, or FRA, you'll be entitled to the exact monthly benefit your earnings record allows for. FRA is either 66, 67, or somewhere in between, depending on your year of birth.
But the Social Security Administration won't force you to wait until FRA to collect your benefits. In fact, you're allowed to file as early as age 62. There's just one catch: For each month you claim your benefits early (meaning, before FRA), they'll be reduced on a permanent basis (unless you manage to undo your filing, which is easier said than done).
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Specifically, you'll lose 6.67% of your benefits per year for the first three years you file early, and then 5% a year for each year thereafter. That may sound confusing, but what it means is that if your FRA is 67 and you file at 64, you'll lose 20% of your benefits. If you file at 62 with an FRA of 67, you'll lose 30% of your benefits. And if you're entering retirement without much savings, that's a hit you probably can't afford to take.
Still, there are some scenarios where it pays to claim Social Security ahead of FRA. Here are a few that could apply to you.
1. You can't support yourself without those benefits
Many people plan to work well into their 60s, only to lose their jobs or find themselves forced to quit when health issues get in their way. If you're in a situation where you can't work, and you don't have enough savings to pay your basic bills, then you may, frankly, have no choice but to claim Social Security early.
And if you're thinking of charging your expenses on a credit card for a year or two to let your benefits sit and grow, big mistake. The interest you'll pay on those cards could be exorbitant, and at some point, you might max out your credit limit, at which point you're stuck. A better bet is to claim your benefits early if you just plain need the money to live.
2. You have a shortened life expectancy
Here's an interesting fact about Social Security: Technically, it should pay you the same total lifetime benefit regardless of when you initially file. Though claiming benefits early will reduce the amount of money you receive each month, you'll collect a greater number of monthly payments so that in the end, it all evens out.
But that assumes that you wind up living an average lifespan. If your health is poor and you have a family history of dying young, then filing early could actually help you eke out more Social Security income in your lifetime.
Imagine your FRA is 67, at which point you're entitled to a $1,600 monthly benefit. Filing at 62 will shrink each payment you receive to $1,120, but you'll collect 60 more payments than you would at FRA. If you live until roughly age 78-1/2, you'll break even under both scenarios -- meaning, you'll wind up collecting about $223,000 in lifetime benefits regardless of whether you file at 62 versus 67. But look what happens if you only live until 74 -- suddenly, you come out almost $27,000 ahead in your lifetime when you file at 62 rather than wait until FRA.
3. You want the money to start a business
Though many people associate retirement with not working, it's actually a great time to start a business. Think about it: You can pursue a passion you've always wanted to dabble in, and you can do so at your own pace and on your own schedule, without having a boss to answer to. Not only that, but you'll have the opportunity to generate income, all the while giving yourself something meaningful to do with your days.
Small businesses, however, tend to require money to get off the ground, and with community banks dwindling, snagging a loan can be easier said than done. On the other hand, filing for Social Security early could give you access to the cash you need to get that business started, and if you can afford the hit on your monthly benefits because your savings are solid, it's worth doing.
You'll often hear that filing for Social Security early is a truly bad idea, and in some cases, that's valid advice. But as you can see, there are plenty of good reasons to claim benefits ahead of FRA, and if any of them apply to you, you shouldn't hesitate to snag the money that's rightfully yours.
