One great thing about Social Security is that it's a pretty flexible program. You're allowed to sign up for benefits as early as age 62, or you can hold off on filing all the way until age 70.
Of course, there are benefits and drawbacks to filing at different ages. The upside of filing at age 62 is clear -- you'll get access to your money as soon as you're eligible. But here's why signing up for benefits at 62 isn't a great idea at all.
Can you afford to slash a major income stream?
Filing for Social Security at age 62 means locking in a lower monthly benefit for life. You're entitled to your full monthly benefit, based on your personal wage history, once you reach full retirement age, which is either 66, 67, or somewhere in between. Now, say your full retirement age is 67. If you file at 62, you'll cut your benefits by 30%, and that reduction will remain in effect for the rest of your life.
If you've saved up a giant nest egg for retirement, then you may be perfectly fine to reduce your benefits. But if you're not as confident in your savings, then holding off on Social Security definitely pays.
Also, your nest egg might seem pretty large at first glance, but you may be surprised at how little income it actually gives you on annual basis. Say you manage to retire with $500,000. That's a lot of money, right? But if you need that money to last 30 years, which is conceivable given today's life expectancies, then you'll probably want to limit yourself to a withdrawal rate of 3% to 4% per year, giving you $15,000 to $20,000 in annual income from savings.
Now, say you're entitled to $1,600 a month from Social Security at full retirement age -- that's actually a little more than what the typical senior collects today. Filing at 62 means cutting your benefit down to $1,120. That means Social Security will pay you $13,440 a year. Even if you add that to $20,000 a year from retirement savings, that's only $33,440 -- which means you'll have to find a way to live on less than $3,000 a month. And don't forget about taxes -- unless you have your savings in a Roth IRA or Roth 401(k), you won't get to keep those withdrawals in full.
That's why filing for Social Security at age 62 is generally not advisable. If you don't have much of a nest egg or, worse yet, any savings at all, then claiming benefits at 62 could mean sentencing yourself to a world of financial struggle. But even if you do have savings, as you can see from our example, that money may not go as far as you expect it to.
Also remember that if the stock market tanks at any point during your retirement, your IRA or 401(k) balance could go down, leaving you with less money than expected. The wonderful thing about Social Security is that it's guaranteed to pay you the same monthly benefit for life -- it doesn't matter how the stock market performs.
Make the right call
There are some situations where claiming Social Security at age 62 is actually a smart move. But for many seniors, it's the wrong choice. Think about the pros and cons, as well as your personal financial circumstances, before making that call so you don't wind up regretting your decision after the fact.