The amount you'll receive from Social Security -- a critical source of retirement income -- will depend significantly on when you begin drawing your benefits. You can start collecting Social Security as young as age 62, but if you do, you might end up forgoing thousands of dollars in benefits every year and leaving tens of thousands of dollars in benefits on the table over your lifetime. Additionally, you could be locking your spouse into a lifetime of lower-than-expected income. Here are three terrible reasons for deciding to claim your Social Security benefits early.
No. 1: You want financial freedom now
At first blush, it may seem financially savvy to pocket Social Security checks at age 62 to boost your monthly income, but if you dig deeper into the rules associated with Social Security, you'll discover that claiming early to shore up your financial situation may not be the best move.
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You see, Social Security only pays your full benefit if you wait until your full retirement age to claim. Full retirement age varies, but for people born after 1954, it ranges between age 66 to age 67. If you claim earlier than that, then Social Security is going to cut your benefit by a lot. It reduces it by 5/9 of 1% for every month you claim early up to 36 months, and then subtracts it by 5/12 of 1% for each additional month. Those fractions can really add up. For instance, if your full retirement age is 67 and you claim at age 62, you'll get 30% less per month than if you waited.
There's also a quirk that makes claiming early less attractive if you continue working. Social Security only allows you to earn up to a certain amount every year before it begins holding back a little of your benefit. The amount you can earn changes every year, but it will hold back $1 for every $2 you make above $17,040 in 2018. This means if you claim at age 62 and plan to continue working, you could wind up getting far less than you had hoped in additional income.
No. 2: You want to maximize your lifetime benefits
It can be tempting to take Social Security early to make sure you collect as much as possible before you die. However, we're living longer than ever before thanks to medical advances, and as a result, you could wind up shortchanging yourself if you claim at age 62. The United Nations projects that Americans turning 65 in the next decade will live 20 or more years, up from less than 15 more years in the 1950s.
Data: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, custom data acquired via website.
Social Security is set up to pay out the same amount to the average recipient over their lifetime, regardless of when they claim. That's why they reduce the payout you receive if you claim early. It's also why they offer a bonus for waiting. Specifically, up until age 70, you'll get an extra two-thirds of 1% for every month you hold off on claiming after reaching full retirement age, or 8% per year. This means if your full retirement age is 67 and you wait until 70, you'll collect 24% more than you would've if you'd claimed on time.
Social Security uses average life expectancy tables to calculate these reductions and increases, but your life-span could be much shorter or longer than average. If you're in good health and longevity runs in your family, then holding off and collecting bigger checks could result in greater lifetime benefits than claiming early.
Data source: Author's chart.
No. 3: You want to guarantee your spouse's financial security after you're gone
If your spouse will be claiming Social Security spousal benefits, then there's another quirk to Social Security that can make claiming at age 62 a mistake.
Typically, spouse's qualify for spousal benefits if the amount they'd collect based on their own work record is less than 50% of the amount their spouse would receive at full retirement age.
If a spouse claims earlier than their own full retirement age, then their payment is reduced by 25/36 of 1% for for every month claimed early up to 36 months and 5/12 of 1% for every month beyond 36. However, there's no incentive for a spouse to delay claiming spousal benefits beyond full retirement age because delayed retirement credits don't apply to spousal benefits.
Spousal benefits can give your household income a nice boost, but widows and widowers can't receive both a spousal benefit and their spouse's benefit after their spouse passes away. They'll only receive the higher of the two amounts, so their monthly income could decline following your death.
This drop in income could strain your spouse's budget if Social Security is their only source of income. So, think carefully before deciding to claim early if you think your spouse may outlive you.
