Your decision about when to start Social Security affects your income for the rest of your life, so it’s not a choice to be taken lightly.
Unfortunately, far too many people leave the workforce and claim Social Security benefits for the wrong reason. In fact, research from the Schroders Global Investor Study revealed 51% of Americans indicated reaching the age of Social Security eligibility would prompt them to retire — compared to just 4% who said they’d leave the workforce as a result of hitting their financial targets for their nest egg.
There are two big problems with this approach, both of which can leave seniors much worse off than they’d be if they made different choices.
1. Claiming Social Security when you first become eligible for benefits can shrink your monthly checks
One of the biggest problems with treating eligibility for Social Security benefits as a trigger for retiring is that it often doesn’t make financial sense to start benefits as soon as they first become available.
Seniors can claim benefits starting at 62. But this is before the full retirement age they must reach in order to get their standard benefit. Depending on birth year, full retirement age is between 66 and four months and 67. Anyone who begins getting monthly checks before that time will face early filing penalties that permanently reduce the size of their payments.
Some seniors could end up with a benefit reduced by as much as 30% if they’ve made the choice to claim Social Security benefits simply because they first become eligible to do so. If the decision to retire was driven not by necessity and older Americans don’t realize the consequences of starting benefits at the first age of eligibility, they could give up hundreds of dollars in monthly income for no real reason.
2. You can’t live on Social Security benefits alone
There’s an even bigger problem with choosing to retire because Social Security benefits became available for the first time — especially if seniors making this move are motivated by access to this income source alone rather than retirement readiness. These benefits cannot be a senior’s sole source of income, as they are intended only to replace 40% of preretirement earnings.
With an average monthly Social Security benefit coming in at just $1,657 in 2022, a senior who filed for benefits in 2022 and earned a typical benefit would be forced to live on around $19,884 per year — or less, since early filing would likely reduce their benefits below the average.
That’s an insufficient sum for most people to maintain a comfortable quality of life. Those who retire without making sure they have a sufficient nest egg to produce plenty of additional income could really come to regret it.
How should you decide when to retire?
Rather than using Social Security eligibility as a guide for when to retire, it’s important to make this life choice based on a careful assessment of your financial situation.
You should leave the workforce only if:
You have a good-sized nest egg that will produce a sufficient amount of retirement income while maintaining a safe withdrawal rate.
You’ve evaluated different Social Security claiming strategies and have chosen the best age to start benefits based on a strategic assessment of how your filing age will affect your monthly benefits, lifetime income, and spousal or survivor benefits your life partner could be eligible for.
You have a plan for how to spend your retirement and have ensured you have enough income to carry it out.
By looking at the big picture rather than just Social Security eligibility, you can ensure that retiring is the right choice for you over the long term.
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