Though many people look forward to collecting Social Security, there's a tough decision to be made in the context of claiming benefits. If you wait until full retirement age to sign up, which is 67 for anyone born in 1960 or later, you'll be able to collect your complete monthly benefit without a reduction.
However, Social Security lets you claim your monthly benefit beginning at age 62. And it can be tempting to sign up to get your money as early as possible. But here are a few big problems with going that route.
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1. You'll reduce your one guaranteed monthly income stream
Ideally, you'll be bringing some savings with you into retirement. But the amount you're able to withdraw each year could change based on factors like market conditions and your portfolio's performance.
Social Security, on the other hand, is guaranteed to pay you the same monthly benefit for life. If you permanently reduce that monthly benefit, it means slashing your one guaranteed income stream in retirement.
Remember, too, that Social Security benefits are eligible for an annual cost-of-living adjustment (COLA). The less money you get each month, the less money those raises will produce for you.
2. You'll risk having benefits withheld if you continue to work
The Social Security Administration allows recipients to receive monthly benefits even if they're still working. And once you reach full retirement age, you can earn any amount of money without risking having some of your benefits withheld.
But if you claim Social Security at 62 and continue to work, you'll risk having some or even all of your monthly benefit withheld if you exceed the program's earnings-test limit. This year, that limit is $23,400 for 62-year-olds. For every $2 you earn above that limit, $1 in Social Security is withheld.
If you file for Social Security at 62 but only work very part-time, this may not be an issue. But if you intend to keep working a good number of hours, to the point where you might exceed the earnings-test limit, you may want to hold off on taking benefits.
3. Your spouse could end up with a smaller survivor benefit
If you're the higher-earning spouse in your household, you need to be very careful about claiming Social Security at 62 -- especially if you expect your spouse to outlive you. Once you pass away, your spouse will generally be entitled to a survivor benefit from Social Security equal to the monthly benefit you were eligible for.
If you claim Social Security at 62, you'll reduce your monthly benefit by about 30% compared to waiting until full retirement age. But that means your spouse will also be looking at a reduced survivor benefit for the rest of their life.
Think through your choice carefully
There are plenty of situations where claiming Social Security at 62 makes sense. The best thing to do is consider your financial circumstances and, if you're married, consult with your spouse to arrive at the best filing decision.
You may come to the conclusion that taking benefits at 62 is a smart move. But it's important to recognize these pitfalls before committing to that choice.
