You may be tempted to sign up for Social Security ahead of full retirement age (FRA) to get your money sooner. You’re allowed to claim benefits as early as age 62, whereas FRA doesn’t kick in until 66, 67, or somewhere in between, depending on your year of birth.
Of course, the problem with taking benefits before FRA is that you’ll reduce them permanently in the process. Some seniors are willing to forgo a higher benefit in exchange for that early access, but if the following scenarios apply to you, you’re probably better off waiting to file.
1. You don’t have a lot of retirement savings
You shouldn’t expect Social Security to pay all of your bills. In fact, those benefits will generally replace about 40% of your pre-retirement wages, assuming you’re an average earner. Many seniors end up needing a lot more income than that to live comfortably, and often, the difference comes from retirement savings.
But if you don’t have a particularly robust nest egg, then claiming Social Security early could really backfire. If those benefits do end up being your primary income stream, reducing them could result in years of financial struggles, so pay attention to what your savings look like before signing up.
2. You’re still able to work
Claiming Social Security early will reduce your monthly benefit. But if you haven’t yet reached FRA and you decide to work and collect Social Security at the same time, your benefits could be reduced even further in the form of withholding if you earn too much money.
You’re allowed to earn up to $18,240 in 2020 without having it impact your Social Security income if you’re collecting benefits before FRA while holding down a job. From there, you’ll have $1 in benefits withheld for each $2 you earn. If you’ll be reaching FRA this year, you can earn up to $46,920 without it impacting your Social Security income, but beyond that point, you’ll have $1 in benefits withheld for every $3 of job-related earnings.
Now to be clear, the benefits you have withheld aren’t lost forever; they’re paid back to you later on, once you do reach FRA. But the reduction in benefits you’ll face by virtue of claiming them early will be permanent, so if you’re able to keep working and earn a substantial enough paycheck, sitting tight on Social Security could make more sense.
3. You expect to live a long life
Social Security is technically designed to pay you the same total lifetime benefit no matter when you file. How can that be? When you file early, you get a lower payment each month, but you get that money sooner. If you wait on benefits, you get more money each month, but fewer months’ worth of benefits, so all told, things should even out.
That said, if you end up living a long life, you’ll generally lose out, financially speaking, by claiming benefits early. For example, if you’re entitled to $1,500 a month at an FRA of 67, signing up at 62 will give you $1,050 a month instead. You’ll break even in both filing scenarios if you live until around age 78 1/2. But if you live until 90, you’ll lose out on $61,200 in lifetime benefits if you claim them at 62 rather than wait until your FRA of 67.
There are some scenarios where it makes sense to sign up for Social Security before reaching FRA. But if any of the above apply to you, then it generally pays to wait until FRA to file — or even beyond. For each year you delay your benefits past FRA, they increase by 8%, up until age 70, so that’s another option to consider when you contemplate your Social Security filing decision.