Many seniors will inevitably become heavily reliant on Social Security to cover their living costs in retirement. And you might one day join their ranks.
That's why it's so important to file for Social Security strategically. You're entitled to your full monthly benefit based on your personal wage history once full retirement age, or FRA, arrives. That age is 67 for anyone born in 1960 or later.
However, once you reach the age of 62, you can sign up for Social Security whenever you want. Filing for benefits ahead of FRA, however, has consequences. Specifically, you'll face a reduction in benefits, the extent of which will depend on how early you file.
Image source: Getty Images.
If you claim Social Security at age 62 with a FRA of 67, your benefits will take a 30% hit. If you file for benefits before FRA but at a later age than 62, that reduction will be less severe.
You'll often hear that filing for Social Security early is not a good idea. After all, you'll be slashing a guaranteed income stream for life, and you'll be putting more pressure on your savings -- which may or may not be plentiful.
But in some cases, claiming Social Security ahead of FRA is a smart idea. If you're carrying high-interest debt, filing for benefits early to dig out of it is an option you may want to consider.
When the numbers make sense
You might reduce your Social Security income substantially by claiming benefits before FRA arrives. But if you're carrying a whopping set of balances on credit cards with high interest rates attached to them, getting your benefits early might serve the purpose of allowing you to chip away at your debt. And you might actually come out ahead financially by virtue of the savings you reap.
To be clear, this tactic isn't necessarily advisable if you owe, say, $2,000 on your credit cards. That's a sum you might manage to pay off within a year or two, even with hefty interest accruing against you. And it may not be worth it to slash your Social Security benefits for life to whittle down a relatively small balance.
Rather, this strategy may be more suitable if you have a lot of high-interest debt, and you stand to accrue many, many thousands of dollars of interest in your lifetime due to having it drag on. In that situation, what you lose by having a reduced Social Security benefit for life, you might gain in the form of interest savings. So it's worth sitting down with an accountant or financial advisor, crunching the numbers, and seeing what makes sense for you.
As one example, if you're entitled to a monthly Social Security benefit of $1,800 at a FRA of 67, filing at 62 will slash that benefit to $1,260. If you live until age 82, you'll lose $21,600 in lifetime Social Security income by filing early. But if you owe many thousands of dollars on your credit cards at age 62, and you carry that debt for 20 years, you might rack up more than $21,600 in interest, depending on the terms of your credit cards.
There are definitely consequences to claiming Social Security ahead of FRA. But if you're loaded with high-interest debt, it is worth seeing if an early Social Security filing could be your ticket to unloading that debt sooner. This tactic may seem unconventional. But it's worth exploring if you don't see any other way to get out of debt sooner.
