Many people dream of retiring early and getting to spend their days doing the things they want to do. And then there are those people who retire early not because they've always wanted to, but because they're forced out of a job.
Either way, if you're an early retiree, you may be tempted to claim Social Security as soon as your career comes to an end. But holding off on taking benefits could really work to your advantage in the long run.
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Do you really want to reduce a guaranteed income stream for life?
Social Security doesn't pay a single universal benefit to all seniors. Rather, the monthly benefit you're entitled to will hinge on how much money you earned during your 35 most profitable years in the labor force.
Your Social Security filing age will also determine how much monthly income the program gives you. If you claim benefits at full retirement age (FRA), you'll get your complete monthly Social Security payout based on your wage history. FRA is 66, 67, or somewhere in the middle, depending on what year you were born.
However, you're allowed to sign up for Social Security starting at age 62. So if you end up retiring early -- say, somewhere between 62 and FRA -- you may be inclined to claim Social Security right away so you can use that money to start paying your bills.
But a big problem with going this route is that you'll be slashing an otherwise guaranteed source of monthly income for life. And that could really end up hurting you if you happen to live well into your 80s or 90s -- or beyond.
As an example, let's say you're entitled to $2,000 a month from Social Security at an FRA of 67. If you retire early at age 62 and sign up for Social Security right away, you'll slash your monthly benefit to $1,400.
That means that for your entire life, Social Security will pay you $7,200 less per year than what you would've collected by waiting until FRA. That could prove problematic if, say, you reach your 90s and your savings have run out.
You may not have to claim benefits right away
Some people may have no choice but to sign up for Social Security as soon as they retire. But if you can avoid doing so, it could work to your advantage.
So to that end, one thing you may want to do before claiming Social Security early is tap your savings. You don't want to withdraw from your nest egg too aggressively, because that could increase your risk of running out of money down the line. But it may not be a bad idea to take larger withdrawals your first few years of retirement so you can let your Social Security benefits grow.
Another option to consider? Work part-time. You may find that if you're earning some amount of money, you're able to tap your IRA or 401(k) plan minimally to eke out enough income to cover your expenses. You may even end up earning enough to cover your bills in full if you adopt a more frugal lifestyle.
Plenty of people claim Social Security as soon as they retire. But if you're retiring early, that's a move that could backfire on you. So before you rush to take benefits, consider whether there's an option that allows you to hold off and sign up a bit later on.
