The decision to claim Social Security benefits isn't an easy one, especially since the Social Security Administration (SSA) effectively gives you an eight-year window for signing up. The earliest age you can file for benefits is 62, while there are financial incentives to hold off on claiming until 70. And to be clear, you're technically not forced to file at 70, but there's no reason to delay past that point.
In the middle of that eight-year period is your full retirement age, or FRA. That's the age at which you get to collect your full monthly Social Security benefit based on your earnings history. FRA is either 66, 67, or somewhere in between, depending on your year of birth.
Because 62 is the earliest option for claiming benefits, it happens to be an extremely popular one. But here are three reasons filing at that age is an exceptionally bad idea.
1. You'll risk lowering your monthly benefit for life
The SSA doesn't let seniors claim benefits early out of the goodness of its heart. If you want that money ahead of FRA, you're going to wind up with less of it on a monthly basis.
You'll lose 6.67% of your monthly benefit per year for the first 36 months you claim Social Security prior to FRA, and then 5% a year for each 12-month period thereafter. As such, if you file at 62 with an FRA of 67, you'll slash your monthly benefit by 30%.
And if you think your full monthly benefit will be reinstated once you reach FRA, sorry -- that's not how the program works. In fact, the only way you won't wind up with a reduced benefit for life is if you manage to undo your filing, which involves withdrawing your benefit application and repaying the SSA every dollar in benefits it paid you within a year. That's generally not an easy thing to do, which is why if you file at 62, the monthly benefit you lock in will generally be what you wind up with indefinitely.
2. You may have benefits withheld if you're still working
Though the SSA allows you to work and collect benefits simultaneously, if you do so prior to reaching FRA, you'll have a portion of your benefits withheld if your earnings exceed a certain threshold. Beginning in 2020, if you're below FRA, you'll have $1 in Social Security withheld for every $2 you earn above $18,240. If you'll be reaching FRA at any point in 2020, you can earn up to $48,600 without impacting your benefits, but once you surpass that point, you'll have $1 in Social Security income withheld for every $3 you earn.
Whatever sum you have withheld will be added back into your benefits once you reach FRA. But the reduction in benefits you face by filing early will still remain in effect on a permanent basis, which is why it's often silly to claim Social Security at 62, particularly if you're still working.
3. You could lose out on lifetime income if your health is great
Social Security is technically designed to provide you with the same amount of lifetime income regardless of when you initially file. Though claiming benefits at 62 means slashing your monthly payments, you'll collect a larger number of individual payments to offset that loss, thereby breaking even. Still, this formula assumes that you'll wind up living an average lifespan. If your health is great, however, you risk losing out on lifetime income from Social Security by filing at 62.
Imagine you're entitled to a monthly benefit of $1,600 at an FRA of 67. Filing at 62 will leave you with $1,120 a month instead. If you live till about 78-1/2, you'll mostly break even under both filing scenarios. But if you end up living until 89, you'll come out almost $60,000 ahead by claiming benefits at 67 rather than jumping the gun at 62. As such, if your health is fantastic going into retirement, filing at 62 could really end up being a big mistake.
Let's be clear: There are some scenarios in which filing for Social Security at 62 makes sense, such as if you've lost your job and desperately need the money, or if your health is poor and you're therefore not expected to live a very long life. But if you're thinking of claiming benefits at 62 to get your hands on that money the instant you can, it pays to reconsider and contemplate the upside of waiting.