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The Disastrous Social Security Decision You Might Be Making

By Maurie Backman - Jan 13, 2020 at 6:49AM

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If you're heavily reliant on Social Security to begin with, then you can't afford an additional hit on your benefits.

Social Security is a key income source for millions of older Americans, so much so that 21% of married seniors and 45% of unmarried retirees rely on it for 90% or more of their income. If you expect to be in a similar boat, most likely due to a lack of retirement savings, then the last thing you'd want to do is slash your most substantial income stream on a permanent basis. But if you claim benefits early, that's exactly what will happen.

How much of a pay cut can you afford in retirement?

If you retire on Social Security alone, you'll be looking at roughly 40% of your previous income, assuming you're an average earner. But most seniors need a lot more than that to stay afloat financially. If that ship has sailed, because you're nearing your golden years without money in savings and you don't have a pension to fall back on, then you may be resigned to living on Social Security by itself, and somehow making that work, whether it's relocating to one of the cheapest areas of the country, downsizing to a much smaller home, or cutting back on most luxuries. But if that's the case, then you probably can't afford the additional hit you'll face by filing for Social Security early.

Older man with serious expression holding document while talking on phone

IMAGE SOURCE: GETTY IMAGES.

Filing early is often bad news

Your Social Security benefits are calculated based on your earnings during your 35 highest-paid years on the job. But you can only collect your full monthly benefit throughout your senior years if you wait until full retirement age, or FRA, to file. FRA is either 66, 67, or somewhere in between, depending on the year you were born.

Age 62, however, remains the most popular age to start taking benefits, largely because it's the earliest age you can do so. But for each month you claim Social Security ahead of FRA, your monthly benefit gets reduced in the process. File at 62 with an FRA of 67, and you'll be looking at a 30% hit on your monthly income. And as a reminder, that's a 30% hit on the 60% pay cut you already took by counting on Social Security as your sole retirement income source.

Don't slash those benefits

If you're entering retirement with no obvious income stream outside of Social Security, then if anything, you should push yourself to delay your benefits, not claim them early. For each year you hold off on filing past FRA, you'll boost your benefits by 8%, up until you turn 70. That means you could snag a permanent 24% increase in your monthly income by filing at 70 when your FRA is 67.

Sadly, though, only about 4% of Social Security recipients opt to claim benefits as late as possible despite the financial benefits of doing so. For some, it boils down to a lack of patience. For others, it's fear that they won't live long enough to come out ahead financially.

To be fair, delaying benefits is really only a smart move for seniors in decent health. Those who don't expect to live very long into retirement are generally better off taking benefits as early as possible to come away with the largest possible lifetime payout (keeping in mind that while filing early reduces your benefits on a monthly basis, you get a larger number of individual payments, and if you pass away much sooner than the average senior, you typically wind up benefiting from an early filing).

But assuming your health is reasonably good shape, it pays to delay Social Security, or at least hold off on filing until FRA, if you expect it to be your sole, or even primary, senior income source. Retirement will likely cost more money than you think, especially when you factor healthcare into the equation. And if you're going to limit yourself to Social Security, then it really pays to score the highest benefit possible.

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