There’s a good chance you’ll depend heavily on Social Security once you enter retirement. Even if you manage to amass a decent chunk of savings by then, your IRA or 401(k) could eventually run out of money. Social Security, however, is set up to pay you a monthly benefit for life.
That’s why it’s so important to get as much money out of the program as you can. But if you file for benefits too soon, you could end up slashing your Social Security income in a very big way.
The monthly Social Security benefit you’re entitled to is based on your personal earnings record — specifically, the amount of money you make during your 35 most-profitable years in the labor force. From there, however, your filing age will dictate what your monthly benefit actually looks like.
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If you wait until full retirement age, or FRA, to file for Social Security, you’ll get the exact benefit your wage history entitles you to. FRA kicks in at 66, 67, or 66 and a specific number of months, depending on the year in which you were born.
But you don’t have to wait until FRA to claim your benefits. Rather, you can sign up as early as age 62 — an option many seniors are quick to jump on.
It’s easy to see the appeal of filing for Social Security early. But there’s a notable downside: For each month you claim benefits ahead of FRA, they take a permanent hit.
If you file for Social Security a year before reaching FRA, your benefits will be reduced by about 6.67%. That’s not necessarily a catastrophic reduction.
But if you claim benefits at the earliest possible age of 62, you’ll slash that income stream by 30% if your FRA is 67. And that’s a hit that may be difficult to overcome, especially if you’re entering retirement without such a robust nest egg.
That’s why it’s important to do two things before filing for Social Security:
Learn your FRA.
Set up a retirement budget to see how much monthly income you need to cover your expenses.
Once you put that budget into place, you may find that you’re looking at higher expenses than you may have initially anticipated. And that might motivate you to hold off on filing for Social Security until FRA or even beyond. For each year you delay your claim past FRA, your benefits will get an 8% boost, up until age 70. And that boost, like any reduction you face, will be permanent.
Even if you’re confident in the nest egg you’ve built, you may still want to avoid claiming Social Security as early as possible. You never know when a 30% hit to your benefits might come back to haunt you.
You may, for example, have every intention of living frugally in retirement, only to encounter health issues that eat up a massive chunk of your income. So having a higher benefit to rely on could spare you a world of financial stress as you age.
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