According to the 2016 federal budget, more than $944 billion was apportioned to the Social Security Administration for the disbursement of benefits just this year. As of March 2016, more than 60 million people were on the SSA's monthly benefits payroll, and just over 40 million of those individuals were retired workers. For these retirees, there may be no program more important in their golden years than Social Security.
Seniors' most important decision
A survey conducted last year by Gallup showed that 59% of current retirees consider Social Security to be a "major source" of income, with another 31% labeling their benefits as a "minor source" of retirement income. Regardless of how you spin the data, nine in 10 of today's seniors count on Social Security to help them meet their monthly expenses. This is why deciding when to file for benefits can be one of, if not the, most important decision seniors make.
Filing early at age 62, the first year a retiree becomes eligible to claim benefits, means accepting a reduced benefit payment for life. When you reach your full retirement age, or FRA, you become entitled to 100% of your benefit. The FRA is a dynamic number that changes progressively with your birth year. Today's retirees born between 1943 and 1954 have an FRA of 66 years, and claiming benefits at age 62 could mean a benefit payment equal to just 75% of their FRA.
Logically, waiting as long as possible to claim would appear to make sense since it'll result in a larger payment over your lifetime. Persons born between 1943 and 1954 who wait to claim until age 70 could see their payment jump to 132% of their FRA. Yet, just one in 10 seniors in 2013 waited until after their FRA to file for benefits.
Five types of people who may benefit from filing at age 62
Why is this? For some people, they simply don't have a good understanding of the program or their options. But for others filing early made complete sense. While taking benefits early is often frowned upon, here are five types of people who may benefit from taking Social Security benefits at 62.
1. People in poor health
Sometimes the decision to claim benefits sooner than later can appear to be pretty simple. If you're in poor health or don't believe you'll live into your 80s, it's probably going to be in your best interest to take benefits early.
Generally speaking, lifetime benefits received tend to hit an inflection point around age 78. If you live longer than this, you're usually better off waiting to claim benefits. However, if you don't hit age 78, then taking benefits earlier can be the smarter move. None of us has a crystal ball that'll tell us how long we're going to live, but we do have our own personal health and family history to be our guide.
2. Seniors who are heavily indebted
Retirees who are deeply in debt may also consider it a wise move to file for benefits sooner rather than later. Although Social Security benefits can be withheld prior to hitting your FRA if you earn too much in a given year, the added income received from Social Security could help make a dent in the amount of debt you owe.
The Consumer Financial Protection Bureau stated in 2014 that the percentage of homeowners age 65 and up carrying mortgage debt grew from 22% in 2001 to 30% in 2011, and for those aged 75 and up, it more than doubled to 21.2% from 8.4%. Filing early could ensure seniors don't deal with the stresses of debt in their golden years.
3. The rich
Well-to-do seniors are another group where it probably makes a lot of sense to consider filing for Social Security benefits early. What's considered "well-to-do?" While I wouldn't go so far as to lay out a specific number, I'm talking about individuals and couples that have far exceeded their retirement goal by a large multiple. For these individuals and couples Social Security income doesn't even factor into their monthly expenses, thus taking benefits early and using that income for travel or other pursuits and passions could be a smart move.
4. People who were laid off or have limited earning capacity
This category is a bit tricky. On one hand, individuals who haven't saved nearly enough for retirement should try to avoid taking Social Security benefits early. Working longer and waiting as long as possible is preferable since it'll allow your benefits to grow at roughly 8% per year; and a bigger benefit could give seniors with smaller nest eggs more wiggle room in their golden years to meet their monthly expenses.
However, not all seniors are going to be able to get work, or for that matter find work that's commensurate with their skill set. Seniors with a small nest egg and with few prospects of finding a job may have little choice but to turn to filing for benefits early. The good news here is that a provision exists (Form 521) allowing an individual to withdraw their request for benefits within 12 months so long as they pay every cent they owe back to the SSA. This "mulligan" is great for seniors who've struggled to find a job and take benefits early only to land a good job months after claiming benefits.
5. Married women
Finally, married women can often find benefits in claiming Social Security benefits at age 62. Speaking generally, the average married woman doesn't work as many years as her husband, nor does she earn as much in lifetime income. Thus, a wife's benefits tend to be lower compared to her husband's.
However, women also have longer life expectancies than men, meaning if they outlive their husband, which data from the Centers for Disease Control and Prevention says is likely, they can choose to take the higher of two payments: their own Social Security benefit or the survivor benefit based on their husband's income and work history. This can actually work out well for couples with women filing for their benefit early and providing an income boost to the household while the husband's benefit grows over time, providing higher income when they hit their 70s and a healthier survivor benefit for his wife when he passes away.
Keep in mind that if you belong to one of these groups, it doesn't mean claiming benefits at 62 is the only decision for you. Everyone's situation is unique, and each retiree needs to assess what works best for them. But you should now have a better understanding that claiming at 62 can have its benefits under the right circumstances.