When you set retirement savings goals, it helps to figure out how much you'll need your investments to produce. This requires some assumptions about both the age when you'll retire and the amount of money that will come from Social Security.
For many future retirees planning to work into retirement, some of their assumptions can get them into trouble. In particular, if you estimate the amount of your Social Security benefits based on claiming them at full retirement age or later, you may anticipate getting a much larger monthly check than you end up with.
To make sure this doesn't happen to you and leave you facing a financial shortfall, the best approach is to assume you'll start your benefits at 62 while trying to claim them later if you can.
Why you should plan for Social Security to start at 62
Social Security sets a full retirement age (FRA), which is between 66 and 67 depending on your birth year. You can't claim benefits before FRA unless you want to be hit with early-filing penalties that cause your standard benefit amount to fall. These penalties apply for each month you claim ahead of FRA and equate to an annual benefits reduction of 6.7% for each of the first three years and 5% for each prior year.
Thanks to these penalties, those who claim benefits at the earliest age allowed, 62, could find themselves facing between a 25% and 30% cut to benefits depending on when their FRA is. That reduction will affect the size of their checks for life.
Claiming at 62 often isn't the financially optimal choice for retirees, many of whom would see more lifetime benefits if they wait. In fact, for most retirees, it's best to wait until after FRA to start benefits since delayed retirement credits can increase their checks for each month up until age 70.
But many retirees don't end up waiting to start their benefits, even though doing so would mean more monthly money. Instead, claiming at 62 is popular because people need their money to retire early, or because they're forced into an unplanned early retirement resulting from a job loss, health problems, or family demands.
If you've anticipated you won't start your benefits until after 62 and it turns out you must start them ASAP, you could end up with much less money from Social Security than planned. This could result in a financial shortfall if you've based your retirement goals on Social Security providing a larger portion of your income than it actually does.
If you anticipate you'll start your benefits at 62, on the other hand, you can make sure you've saved enough so you'll be in a good financial position even if you end up getting the minimum benefit. If you're able to delay your claim, you'll have extra money. But that's a good problem to have.
Social Security beneficiaries may also be facing a benefits cut within the next 15 years due to potential funding shortfalls, and benefits have been steadily losing buying power for decades, so their value is eroding. By anticipating a smaller benefit, you'll be better prepared if you get checks that are less because of these factors, even if you claim your benefits later in life.