No program bears more importance to the financial well-being of our nation's retirees than Social Security. For more than 80 years, it's been doling out benefits to retired workers and is responsible for pulling more than 15 million retirees out of poverty each year.
Because of seniors' reliance on Social Security income to make ends meet, there's arguably no decision more important than choosing when to take benefits. For a majority of Americans (67% as of 2019), their Social Security claim occurred prior to reaching their full retirement age. This means they've accepted a permanent reduction to their monthly payout.
While there are valid reasons to begin taking your benefit early, there are also some truly awful reasons to do so.
You think Social Security will go bankrupt
One of the worst possible reasons to claim Social Security benefits early is because you think the program will go bankrupt and fail to pay you.
There's no question that Social Security is facing some financial hardships. According to the Social Security Board of Trustees, the program is expected to expend more than it collects next year for the first time since 1982. These net cash outflows should grow each year, with the program's $2.9 trillion in asset reserves forecast to be depleted by 2035. This depletion is assumed by some people to mean that Social Security will be insolvent, and therefore unable to pay benefits.
However, this isn't entirely true. Although Social Security's asset reserves may well be exhausted by 2035, the program doesn't need a dime in excess cash to remain solvent. That's because two of the three funding sources for Social Security are recurring. The 12.4% payroll tax on earned income and the taxation of benefits will continue to generate revenue for Social Security, which can then be distributed to eligible beneficiaries.
To be clear, it is fully possible that sweeping benefit cuts may be necessary to ensure the longer-term solvency of Social Security. But based on how the program is funded, it's incapable of going bankrupt.
The program's future solvency should have no bearing on your claiming decision.
You want to double-dip on your income
Another terrible reason to claim Social Security early is because you want to double up on your income streams.
Though the Social Security Administration (SSA) uses the term "retired worker" to describe aged beneficiaries who've qualified for a retirement benefit, not all senior beneficiaries are actually retired. Some choose to continue working, even while receiving a benefit. The thing is, if you plan to work while claiming your Social Security benefit early, you could be in for a rude awakening.
The retirement earnings test allows the SSA to withhold some or all of the benefits of early retirees, depending on how much they earn. For example, early filers who won't reach their full retirement age this year are only allowed to earn up to $18,240 ($1,520 a month) before $1 in benefits is withheld for every $2 in wages or salary above this threshold.
For early filers who will reach their full retirement age in 2020 but have yet to do so, the withholding threshold is $48,560 ($4,050 a month). For every $3 in earned income above this threshold, $1 in benefits is withheld.
The point is, early filers looking to double-up on their income streams while working are often sorely disappointed in the end result.
You haven't taken the time to learn what options are available
It would also be a very bad idea to take your Social Security benefit early without truly understanding the ramifications of that action or the options you have available.
For instance, you might be aware that taking your benefit early can reduce your monthly take-home amount by as much as 30%, relative to what you'd receive at full retirement age. But what you might not realize is that an early filing also reduces what your spouse can receive as a survivor benefit if you pass away first. That could be a serious problem if you happen to be the household-income breadwinner.
You should also be aware of Social Security's do-over clause -- Form SSA-521. Officially known as the "Request for Withdrawal of Application," this mulligan allows beneficiaries to request the SSA to undo their filing within the first 12 months of receiving benefits. Essentially, it's a way to reverse your claim if you regret taking your payout early. This do-over clause can be especially helpful if you were forced into an early claim because you couldn't find work, but then land a well-paying job not long after your benefits began.
Finally, you should know that, statistically speaking, claiming early is rarely an optimal choice. United Income released a study in June 2019 that examined the actual claiming decisions of seniors in 2,000 households in Michigan versus what would have been their optimal claiming decision.
In this sense, "optimal' refers to the age when an individual would have collected the highest amount of lifetime benefits. In its study, just 6.5% of seniors would have made an optimal claiming decision at age 62 or 63. Comparatively, more than 80% of retired workers would have made an optimal claim between ages 67 and 70.