Age 62 happens to be the most popular age to sign up for Social Security. And there’s a reason for that. It’s the earliest age you’re eligible to start receiving a monthly benefit.
If you’re eager to get your money as soon as possible, then you, too, may be planning to file for benefits at 62. But here’s why that idea could backfire on you.
Can you afford a lifelong financial hit?
The monthly Social Security benefit you collect in retirement will be based on your specific wage history, and you’re entitled to it at full retirement age, or FRA. FRA hinges on your year of birth, and it’s either 66, 67, or somewhere in between.
If you have an FRA of 67 — which would be the case if you were born in 1960 or later — then filing for Social Security at 62 will slash your monthly benefit by 30%. But that reduction won’t just be temporary. Rather, you’ll continue to collect that lower benefit for life (unless you happen to undo your filing, which is technically an option but not the easiest thing to do).
Now, let’s say you’ve entered retirement with a healthy amount of money in savings. In that case, you may be able to withstand a hit to your Social Security income.
But what if your savings aren’t so robust? What if, for example, you come into retirement with $200,000 in your IRA or 401(k) plan? If you withdraw from that balance at a rate of 4% a year, which has long been the withdrawal rate financial gurus swear by, that’ll leave you with $8,000 in annual income.
Now, let’s say you’re also entitled to a $1,500 monthly Social Security benefit at an FRA of 67, only you file at 62 instead and reduce that payment to $1,050. Suddenly, you’re looking at $20,600 of annual income ($12,600 from Social Security plus $8,000 from your savings) instead of $26,000 ($18,000 from Social Security plus $6,000 from your savings). That’s clearly a big difference.
Even if you do kick off retirement with a lot more money than that in savings, remember that there’s no guarantee your nest egg will last throughout your senior years. If your investments do poorly or you end up living longer than expected, you could deplete your savings in your lifetime.
Social Security, on the other hand, is guaranteed to pay you a monthly benefit for life. And so reducing that benefit may not be the best idea, especially since you might, one day, end up having to rely on it as your sole income source.
Think your options through
You may have your mind set on claiming Social Security at the age of 62, especially if you’re hoping to retire on the early side. But before you do, think about the dangers of slashing your one guaranteed income stream.
Remember, you don’t necessarily have to wait until FRA to claim benefits, either. You could always settle on a middle-ground option.
Filing at 65, for example, will slash your benefits by 13.34%, which is a much less drastic hit than the 30% you’ll face if you sign up at 62. Spend a little time running the numbers and thinking things through so you don’t regret your decision and struggle financially because of it.
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