Your Social Security benefits are based on your lifetime earnings -- specifically, your 35 highest-paid years on the job. But the age at which you file for benefits will dictate how much money you receive every month during retirement.
If you claim Social Security at full retirement age (FRA), you'll get the exact monthly benefit your earnings history entitles you to. FRA is either 66, 67, or somewhere in between those two ages, depending on the year you were born.
You don't have to claim benefits at FRA, though. You're allowed to file as early as age 62, but for each month you take benefits before FRA, they're reduced in the process. You can also delay benefits past FRA, boosting them by 8% a year up until age 70.
Currently, 62 is the most popular age for seniors to sign up for benefits -- which is unsurprising, given that it's the earliest age. But if you're thinking of going that route, here are a few signs that you're making a big mistake.
1. You don't have a lot of money saved independently
Many seniors who attempt to live on Social Security alone wind up struggling as a result. You can expect those benefits to replace about 40% of your pre-retirement earnings if you have an average income. Meanwhile, you'll likely need 70% to 80% of your former paycheck to maintain a decent lifestyle during retirement, which is why entering your golden years with a healthy level of savings is important.
But not everyone manages to amass a substantial nest egg, and if you're sitting on just a small amount in your IRA or 401(k), you'll be forced to rely heavily on Social Security to pick up the slack. As such, filing early and reducing those benefits could really hurt you financially.
2. Your health is outstanding
Social Security is technically designed to pay you the same lifetime total regardless of whether you claim benefits early, late, or on time. But that break-even formula assumes that you'll live an average lifespan. If your health is great, and you're therefore likely to live as long as the average senior (if not longer), then you'll generally end up losing money by filing as early as you possibly can.
Case in point: If you're entitled to a $1,500 monthly benefit at an FRA of 67, but you file at 62, you'll shrink each monthly payment you collect down to $1,050. If you then live until 85, which is roughly what the typical 65-year-old today is expected to do, then you'll wind up losing out on over $34,000 in lifetime Social Security income by claiming benefits at 62 rather than waiting another five years to file.
3. You're letting fear drive your decision
You may have heard rumors that Social Security is on the verge of bankruptcy, and that benefits won't be around in the future. And if you buy into those rumors, you may be tempted to claim your benefits as soon as you're eligible to avoid losing out on that money completely. But if you rush to claim benefits at 62 because you're convinced Social Security won't be around for much longer, you could wind up depriving yourself of income you really need.
The reality is that while Social Security is experiencing some financial problems, the program is not in danger of going away completely. In a worst-case scenario, it may need to cut benefits in the future, but if that happens, and you file early, you'll get even less money each month. On the other hand, if you wait until FRA (or beyond) to claim benefits, and a universal cut is implemented, you'll still wind up with a higher paycheck each month than you'd get by filing early.
In some cases, claiming Social Security at 62 really does make sense -- for example, if your health is poor, or you're out of work and don't have another source of income to pay the bills. But if you're going to take benefits at 62, do so for the right reason. Otherwise, you may end up kicking yourself later.