American workers have the option of starting Social Security benefits anytime between 62 and 70 years of age. And, the most common age to take Social Security is, you guessed it, 62 -- as early as possible. In fact, nearly half (45%) of Americans decide to file for benefits at the first opportunity, and some do it for the right reasons.
However, not all of the people who file for benefits at 62 have good reasons for doing so. Here are three things that should certainly not make you want to take Social Security early.
Reason 1: Because Social Security is running out of money
This is perhaps the worst possible reason for taking Social Security early. Yes, it's true that Social Security is projected to run out of money -- in fact, the latest estimates call for the trust fund to be completely out of money by 2034. Having said that, it's important to know the real story.
For one thing, Social Security has plenty of money at the moment. In fact, there is more than $2.8 billion in the trust fund. And, when you include the interest earned by those reserves, Social Security is actually expected to run a funding surplus for the next three years, meaning that more money will flow into the system than will be paid out as benefits.
Beyond 2019, the massive baby boomer retirement wave will result in deficits, which will grow larger until the trust funds are depleted in 2034, at which point the incoming payroll taxes will only cover about three-fourths of promised benefits. So, as a worst-case scenario, Social Security benefits would need to be cut by 25% in 18 years.
However, there are several reasons to believe this will never happen. For starters, this isn't the first time Social Security was in financial trouble, and history tells us that something will be done -- either a benefit reduction or tax increase. Any form of benefit reduction is extremely unpopular, so I'd put my money on a tax increase. In fact, 77% of Americans say that Social Security is worth preserving, even if that means paying higher taxes.
If you're interested, here's an in-depth look at how Social Security can and probably will be fixed. The point I'm trying to make is that fear of Social Security "going bankrupt" or anything to that effect is completely unfounded and should not be a reason to claim earlier than you want to.
Reason 2: You're in good health, but just want the money now
One thing everyone should know about Social Security is that as far as lifetime benefits go, it theoretically doesn't matter when you start collecting yours. In other words, whether you start Social Security at 62, 70, or anywhere in between, the average person will receive the same total amount of money throughout their retirement.
However, this is based on actuarial life expectancies -- not on your personal situation. If you're in poor health at 62, or have a family history of heart attacks or a similar high-risk situation, it's probably a good idea to go ahead and take your benefits. On the other hand, if you're in excellent health at 62, still exercise regularly, and both of your parents lived into their 90s, it could work out in your favor to delay Social Security and let your benefit grow.
Keep in mind that even if you're in excellent health at 62, there's no guarantee that you'll outlive the Social Security Administration's life expectancy. However, if there's a reasonably good chance that you will, it can be in your financial best interest to wait.
Reason 3: You're the higher-earning spouse
Unfortunately for millions of married couples, the lucrative file-and-suspend strategy is no longer an option. Using this strategy, the higher-earning spouse would file for benefits at full retirement age, and then immediately suspend payments in order to let his/her benefit grow until age 70. Meanwhile, the other spouse would collect a spousal benefit, even though the primary worker wasn't actively collecting their benefit.
While this is no longer available, there are still ways for couples to maximize their Social Security benefits. One way is for the lower-earning spouse to claim benefits at full retirement age or sooner, while the higher-earning spouse delays Social Security, allowing their own benefit to grow. The idea is that the 8% annual increase for delaying retirement will result in a bigger increase for the higher earner, and the lower-earning spouse filing for benefits early or on time ensures that the couple will have some income right away.
In a nutshell, if one spouse is going to take Social Security at age 62, it makes mathematical sense for the one who expects a lower benefit to do so.
So, when should you take Social Security benefits?
Having said all of this, it's important to mention that there are some good reasons for taking Social Security as early as possible. Just to name a few, if you're in poor health, unemployed, or just need the money, it could certainly be in your financial best interest to take Social Security at 62. However, the point is that you should consider the big picture when deciding when to file for Social Security, including the three points discussed here.
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