The debate over when you should claim Social Security benefits doesn’t have a clear winner, and for good reason: No two financial situations are precisely the same. However, there are certain circumstances that make waiting to claim payments a no-brainer.
Here, we’ll look at the downsides to claiming Social Security as soon as you’re eligible at age 62.
1. Your payments will be (much) lower
Taking Social Security at 62 means that you’ll receive payments sooner, but you’ll also receive much less — about 30% less — than if you were to wait until full retirement age (FRA). While nobody knows precisely how long they’ll live, we do know that, on balance, people stand to live longer now than in previous decades.
This means that if you take Social Security too soon, you’ll end up with the short end of the stick, especially if you live past age 80; in other words, if you end up living beyond your life expectancy, you’ll be receiving much smaller checks than your contemporaries who waited until FRA to claim benefits.
This is all part of a wider calculation that you’ll need to go through with your spouse, family, and hired professionals, but in general, it’s good to know that claiming Social Security too soon could reduce your total benefits collected by a significant amount.
2. You could potentially pay more taxes
By claiming benefits too early, your total income will rise in your early and mid-60s — precisely the time you might be considering Roth conversions or earning another active income.
It’s important to know that 85% of your Social Security benefits will be federally taxable if you file a joint return and have provisional income of over $44,000 for any given year. As a reminder, provisional income is the sum of your AGI, any tax-exempt income (like municipal bond interest), and half of your Social Security benefits.
By waiting to age 70 to claim benefits, you may have no more Roth conversions left to complete, and you might also not have any need or interest to work any longer. Further, claiming later means your Social Security checks will be higher, and there’s also a lower likelihood that they’ll be taxable — especially if these benefit payments are your only income for the year.
3. There’s only a small window to change your mind
If you decide to claim benefits before you need them, you do get a mulligan — but you only get one. That means you can reverse your decision to receive benefits early, but it has to be within 12 months of your initial decision to file, and you must return all benefits received. This can get especially messy if you need to take money out of a pre-tax retirement account, like a 401(k) or IRA, to do so.
Assuming you have enough money by way of personal savings or pension income to last you from age 62 until FRA (currently 67 for those born in 1960 or after), there’s a good argument to wait some amount of time to begin collecting. This way, you can be sure that when you finally do claim benefits, you’ve taken the time to think about it properly and made the decision after giving it the consideration it deserves.
Not an easy call
The decision to take Social Security is not a simple one and should be carefully considered with all of the different factors in your life, both financial and nonfinancial. If you’re having trouble making a decision and you don’t immediately need the money, it’s a good idea to meet with a financial fiduciary who can walk you through your options.
It’s also a smart idea to collaborate with your spouse on this decision, as your choices might ultimately impact theirs down the line. Even though Social Security benefits may not be your sole source of income in retirement, the timing behind your initial claim might significantly change your total financial picture. Be sure to give all scenarios a hard look and then make a choice with confidence.
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