When you get older and start planning for retirement, you have many decisions to make. How much you can collect from Social Security and when you can collect it is usually one of the most important factors in this process.
There's an eight-year window when you'll file for Social Security retired worker benefits, and the timeline you select matters a lot when it comes to your monthly benefit amount, and in turn, your lifetime benefits.
Many people choose to begin collecting Social Security at the earliest allowable age, which is 62. However, if you go this route, you're giving up the opportunity to receive a larger monthly benefit down the road.
To make an informed choice, you should understand exactly what you give up when you start getting retirement benefits as soon as possible.
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This is what you give up with a Social Security claim at 62
The Social Security Administration calculates your standard benefit based on your inflation-adjusted income in the 35 highest-earning years of your career. The resulting figure is what you're eligible to receive from the program assuming you file for benefits at full retirement age (67 for those born in 1960 or later).
If you claim before full retirement age, there is a penalty based on the number of months you filed prior to reaching that milestone. For months one to 36, it is 5/9 of 1% per month, but for each additional month, it is 5/12 of 1%. While the early filing penalty may seem insignificant at less than 1% of your standard benefit per month, it adds up quickly.
For years one, two, and three, the annual cut is about 6.7%; then, it falls to 5% for years four and five. That means claiming benefits five years before full retirement age, at 62 instead of 67, results in a 30% total reduction from your standard benefit.
If your standard benefit would have been $1,900 monthly, a claim five years ahead of schedule would reduce that amount to just $1,330, or an annual difference of $6,840.
Does that mean claiming at 62 is always the wrong move?
Obviously, losing 30% of your Social Security is a big hit, especially when many retirees already feel income from the program is insufficient, and benefits are losing their buying power over time due to inflation.
However, there are some situations when it does make sense to start benefits at the youngest age you can.
One clear example is if you're married, and you're the lower-earning spouse in your relationship. If filing for Social Security early can provide you with enough income to allow your partner, the higher-earning spouse, to delay their own claim, then this strategy may help the two of you maximize your lifetime benefits.
This isn't the only situation where an early claim is smart, either, despite what you give up. If you have to take too much money out of your 401(k) to support yourself without Social Security, and you don't have other options like delaying retirement, then claiming benefits is better than draining your savings too quickly.
Ultimately, the key is to understand that early filing penalties can be substantial, so before leaving money on the table by claiming before full retirement age, be sure to consider the pros and cons of doing so in the context of your overall retirement plans.
