Millions of seniors today receive a monthly benefit from Social Security. And for many, that's their primary source of income.
Now ideally, you won't land in that boat, but rather will build yourself a nice amount of savings to tap in retirement. But even so, there's a good chance you'll end up relying on Social Security to some degree, so it's important to make the most of your benefits. And to do so, you'll need to file at the right time.
Now you may be inclined to claim Social Security early -- meaning, before your full retirement age (FRA) arrives. You can sign up for benefits as early as age 62.
In some cases, filing early actually makes sense. But there's one situation where you could end up claiming benefits early for a really bad reason.
Don't let fear drive your decision
Many people are worried that Social Security is in the process of going bankrupt. If you've heard the same, then you may be inclined to sign up for benefits as soon as you're able to. That way, you can get some money before the program runs out of funds.
But Social Security is not, in fact, going bankrupt. And if you claim your benefits early because you're convinced that's what's going on, you could end up shorting yourself on income that becomes vital to your comfort, and even survival, during retirement.
So here's the real scoop on Social Security. What's happening is that in the coming years, the program expects to owe more money in benefits than it collects in revenue. Social Security plans to tap its trust funds to bridge that gap. But once those funds run dry, benefit cuts may be on the table.
But there's a world of a difference between benefits being cut and going away completely. And if you claim Social Security early for the express purpose of getting some money before the program disappears, you might sorely regret that decision afterward.
Let's say you decide to file for benefits at age 62 when your FRA doesn't arrive until age 67. Doing so will mean slashing your benefits by 30% -- for life. Even if Social Security is forced to cut benefits, you'll give yourself an even greater reduction by virtue of signing up early.
So, let's say Social Security cuts come down the pike, and benefits are reduced by 20%. If you sign up at FRA for a monthly benefit of $2,000, you'll see that benefit cut down to $1,600. But if you sign up at 62 and slash your benefit 30% in the process, you'll be left with $1,400. And following a 20% reduction in benefits, your monthly payments will be whittled down to just $1,120.
Get your facts straight
There are plenty of good reasons to sign up for Social Security early. But doing so because you think the program is going away isn't one of them. So rather than give in to fear, take the time to read up on what's happening with Social Security so you can make the best filing decision for your retirement.