There are certain financial decisions in the context of retirement that are pretty easy to make. For example, the decision to enroll in Medicare may not be so difficult if you don't have better health coverage through a job when you turn 65.
But claiming Social Security is a tough decision, and for good reason. While the program's benefits formula takes your 35 highest-paid years of wages into account when calculating your monthly payments, your filing age determines whether you get your monthly benefits in full, or at a reduced or boosted rate.
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Full retirement age for Social Security is 67 for anyone born in 1960 or later. The earliest age to claim Social Security, meanwhile, is 62.
If you file for Social Security at 62 with a full retirement age of 67, you'll slash your monthly benefits by 30% -- for life. On the flip side, if you delay your Social Security claim past full retirement age, for each year you do, until you reach age 70, your monthly benefits get a permanent 8% boost.
Because claiming Social Security at 62 results in such a drastic reduction, you might assume that it's unwise to file that early. But actually, under the right circumstances, it can be a very smart decision.
It's a matter of how much you need your benefits
A lot of people reach retirement age without having accumulated much of a nest egg. People without a robust IRA or 401(k) plan balance often have to rely on Social Security to cover most of their bills.
In that situation, it's generally not a great idea to claim Social Security ahead of full retirement age if you don't have to. If your retirement savings will only provide you with a small amount of income, you may not be able to afford a reduced monthly benefit for life.
On the other hand, some people save well all their lives and end up with a large IRA or 401(k) balance by the time retirement rolls around -- a large-enough balance to easily cover all of their expenses without a need for extra money. If you're in a situation like that, then claiming Social Security at 62 is not a poor choice at all.
As people get older, their health and mobility tend to decline. So if you're in good health at age 62 and your Social Security benefits represent extra money you can use for your own enjoyment, then you may want to sign up at a time when they can do more for you.
This isn't to say that if you're in great shape at 62, you're guaranteed to be in a lot worse shape by 67. Rather, it's that if you know you're in good shape to enjoy your Social Security benefits at 62 and you can afford a reduction, you may want to grab that money immediately rather than run the risk of not getting to enjoy it as much later on.
Imagine you've always wanted to hike internationally. If you're in proper shape to take those big trips at 62, waiting could mean losing out on the opportunity. So if your Social Security benefits are really just extra money and you have a meaningful use for that money at 62, you may want to sign up as early as possible.
Either way, think through your choice carefully
The decision to claim Social Security is a big one, whether you have a lot of retirement savings or you're approaching your senior years with a minimal IRA or 401(k) balance. It's important to take the time to understand your options and calculate the difference in monthly payouts across various filing ages.
Remember, it's not as if your only choice is to claim Social Security at 62 versus 67, or 67 versus 70. You may decide that it makes sense to sign up for benefits at 63, or 64 and a half.
The point, however, is that signing up for Social Security as early as possible isn't automatically a bad decision. It could, depending on your circumstances, end up being a very wise choice.
