You get flexibility when it comes to signing up for Social Security. You can opt to wait until your full retirement age (FRA), which is 66, 67, or somewhere in between, depending on when you were born, and that way, you'll get the full monthly benefit your earnings history entitles you to.
But you can easily file for Social Security before or after FRA. If you go the latter route, you'll actually give your benefits a nice boost that will remain in effect on a permanent basis. But if you file ahead of FRA, the opposite will happen -- your benefits will get slashed forever.
The earliest age you can sign up for Social Security is 62, and not surprisingly, it happens to be the most popular age to file. But while you may be eager to claim your benefits the moment you're eligible, here's why that plan could backfire.
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Your retirement savings may fall short
Seniors who approach retirement with a healthy level of savings are often tempted to claim Social Security as early as possible. The logic is that since they've saved enough to cover their essential bills, they should be free to start collecting Social Security early and use that money for travel or other leisure purposes.
That logic isn't totally flawed. If you really do enter retirement with a heaping pile of savings, then it may not matter when you claim Social Security, and so if you want to file at age 62, so be it. But your definition of a healthy level of savings may need a reality check.
These days, people are living longer, and so it's conceivable that you may need your savings to last for a solid 30 years. And if so, you'll probably want to take withdrawals from your savings at a rate of 4% per year, as that's what experts have long recommended. (To be clear, there are some problems with that guidance, and it's certainly not perfect, but it's also a reasonable starting point to work with.)
Now, let's say you enter retirement with $1 million in savings. You might think you're all set to claim Social Security whenever you please, since you won't be reliant on your benefits to cover your bills.
But when we apply a 4% withdrawal rate to $1 million, it amounts to $40,000 a year in income. Okay, that's still not bad, right?
Well, it depends on the lifestyle you want to lead and what your personal expenses look like. It also depends on the type of retirement savings plan you have. If your money is tucked away in a traditional IRA or 401(k), that $40,000 becomes taxable income, so you lose a portion of it to the IRS. It's only funds saved in a Roth account that aren't subject to taxes.
Now, let's get back to claiming Social Security. If you're in line for a monthly benefit of $1,500 at an FRA of 67 and you file at age 62 instead, that total shrinks to $1,050. That translates into $12,600 per year of income. When we add in that $40,000 from retirement savings, you're looking at $52,600.
Is that a livable income? Sure. But is it really enough to buy you your dream retirement, complete with travel and other forms of entertainment? Maybe not.
On the other hand, if you were to claim Social Security at 67, you'd boost your annual income by $5,400. That's enough to cover a couple of nice vacations, a country club membership, or expenses that might crop up that are less fun, like extra healthcare costs in the event you wind up needing surgery.
That's why it's important to think through your decision before rushing to file for Social Security at 62. You might assume you're all set with a solid income because you have a large amount of retirement savings only to realize that on an annual basis, you're not getting as much money out of your nest egg as you think. A higher Social Security benefit could easily fill that gap and buy you the freedom to really enjoy retirement to the fullest.
