The earliest age at which you can claim retirement benefits is 62. Once you have finally reached this milestone, you may be eager to start collecting your payments. But before you jump into a claim, there are a few basic facts that every 62-year-old must know about Social Security.
These facts will help you understand the role Social Security is going to play in your retirement and enable you to make informed choices about your benefits. Here's what you need to know.
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1. Social Security benefits are based on average wages
Once you turn 62 and become eligible for Social Security, you must know how your benefit is calculated. Understanding this is critical to deciding when to retire.
See, your benefit is based on a percentage of your average indexed monthly earnings (AIME). The Social Security Administration adjusts wages throughout your career to account for the effects of inflation. You then receive a benefit equal to a set percentage of your average wages.
However, the Social Security Administration only counts your 35 highest-earning years when determining how big your benefits should be. The problem is that if you work fewer than 35 years, you will have years of $0 wages factored in. And if you have lower-earning years in your formula calculation and work exactly 35 years, those lower-earning years will bring down your benefit amount.
If you want to maximize your Social Security payments, consider trying to work until you have a minimum of 35 years of solid earnings under your belt. If you make this goal part of your retirement planning process, you could wind up with significantly more income in the end.
2. Benefits are only intended to replace around 40% of your income
The next key thing to know is that Social Security benefits are only intended to replace around 40% of pre-retirement income. Because benefits are progressive, those who have a higher income will see an even lower replacement rate. This is important to knkow because if you claim benefits without other income sources (such as money from retirement plans), you could really struggle to support yourself.
Confirm the size of your benefit, and look at how much you can withdraw from your 401(k) and other retirement plans at a safe withdrawal rate before you retire, so you can feel confident you have the funds you need to support yourself.
3. Claiming at 62 is an early claim that will reduce your payments
Finally, you should know that claiming Social Security at 62 reduces your benefit. You do not qualify for your primary insurance amount (the standard benefit set based on average wages) until you've reached your full retirement age.
FRA is 67 for anyone born in 1960 or later, so a claim at 62 results in a very substantial 30% benefits reduction due to five years of early filing penalties. The reduction in benefits is permanent. Your benefit will not be readjusted up to what you would have collected if you had waited to claim your benefits.
Now you know the truth about three essential Social Security facts and can make an informed decision about what claiming age is best and if you're even ready to start your checks at all.
