Don’t Claim Social Security Early Unless You Can Say Yes to This Question

Retirement is a period of life many people look forward to. But let’s face it — it can also be daunting, financially speaking.

While some seniors opt to continue working part-time to improve their financial situations in retirement, many don’t. More to the point, many can’t, for reasons that can range from mobility issues to health problems to the need to care for a loved one.

That means a large share of retirees are relying on just two sources for income: Social Security, and their personal savings and investments. So if you’re thinking of filing for Social Security early, there’s one important question you need to answer first.

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Your filing age matters

The earliest anyone can claim Social Security retirement benefits is their 62nd birthday. But you can’t get what the government defines as your “full” benefit unless you wait to file until you reach what it designates as your full retirement age (FRA). For anyone who hasn’t retired yet, that will be 66, 67, or 66 plus a specific number of months — it depends on what year you were born.

For each month you claim Social Security before your FRA, the size of your monthly benefit gets reduced by a fraction of a percent. As you might imagine, signing up at age 66 1/2 when your FRA is 67 won’t result in such a large hit. But those fractions can add up: Filing at 62 with an FRA of 67 will cause your monthly benefit to be slashed by 30%. So if you’re thinking of signing up for benefits early, you’ll want to make sure that doing so isn’t likely to leave you struggling financially throughout your retirement due to those smaller monthly checks.

The big question: Can I mostly live on the income my savings and investments will provide?

If you can answer yes to that question, then claiming Social Security early may not be such a risky move.

Consider how much you’ll be able to withdraw each year from your tax-advantaged retirement accounts and your brokerage accounts without depleting them too fast, and factor in whatever dividends and interest your assets will distribute, too. If you’ve done the budgeting math and concluded that you’ll be able to cover most of your expenses from those funds, you can probably afford the hit to your federal benefits that comes from filing for them early. And in that case, taking Social Security early might give you the opportunity to leave a job that you’ve grown weary of sooner, and a chance to enjoy hobbies and travel while your health is still relatively strong.

But let’s be clear — if your portfolio isn’t robust enough to cover most of your living expenses, then claiming Social Security early is a move you might end up sorely regretting. So crunch all the numbers before you decide on your filing age.

Know what to expect from your savings

It’s easy to look at a large IRA or 401(k) balance and assume you’re covered for life. But remember, if you draw down on your assets at a rate of 4% per year, a $1 million portfolio will only give you $40,000 of income each year.

Financial experts have been using the 4% Rule as a common baseline for decades, but in recent times, some have warned that 4% is actually a bit high, because the market’s average growth is expected to slow in the years ahead. According to a Morningstar study published in late 2021, retirees looking to ensure that their portfolio lasts as long as they do should target an annual withdrawal rate of 3.3%.

Now either way, in that scenario (with $1 million in your portfolio), if you estimate your annual living costs in retirement will be $50,000, you’re probably OK to claim Social Security early. But if your living costs will amount to $80,000 a year, then you may want to hold off until you reach FRA — or even beyond.

If you postpone filing past your FRA, you’ll permanently boost your monthly benefits by 8% for each year you delay, up until you turn 70. So if you have any doubts about how much buying power your savings and investments will provide you, it pays to consider waiting until FRA or later to start taking Social Security.

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