3 Reasons to Take Social Security Early

Are you a senior nearing retirement and considering when to claim your Social Security benefits? You’re not alone. In fact, according to a recent survey, 56% of American workers say their retirement savings are behind where they need to be. For many, claiming Social Security early is a tempting option to help make ends meet.

Although financial advisors typically suggest waiting until full retirement age or beyond to claim benefits, there are various compelling reasons seniors may opt to start collecting Social Security as early as age 62, also known as the Social Security early retirement age.

We’ll take a look at some potential drawbacks to consider before making your decision. You’ll have a better understanding of the factors that influence when to claim Social Security and be better equipped to make an informed choice based on your unique circumstances.

Understanding Social Security Benefits

Before we discuss why seniors might claim Social Security early, let’s first understand how benefits are calculated and the impact of claiming age on monthly payments.

How Benefits Are Calculated

Your Social Security benefits are based on your lifetime earnings, specifically the 35 years you earned the most. The Social Security Administration (SSA) applies a formula to these earnings to determine your primary insurance amount (PIA), which is the benefit you’d receive if you claimed at your full retirement age.

Full Retirement Age and the Impact of Claiming Early

Your full retirement age (FRA) is the age at which you’re entitled to 100% of your PIA. For seniors born between 1943 and 1954, the FRA is 66. It gradually increases to 67 for those born in 1960 or later.

Your monthly payment will be permanently reduced if you claim benefits before your FRA. For example:

• If your FRA is 66 and you claim at 62, your benefits will be reduced by 25%.
• If your FRA is 67 and you claim at 62, your benefits will be reduced by 30%.

On the flip side, delaying benefits past your FRA will result in a higher monthly payment. Each year you wait, your benefits increase by 8% until you reach age 70.

Why Should I Take Social Security Early?

For many Americans, Social Security forms the foundation of their retirement income. According to the SSA, Social Security benefits replace about 40% of the average worker’s pre-retirement income.

However, Social Security was never meant to be the sole source of retirement income. Financial experts recommend a combination of Social Security, personal savings, and pension income (if available) to ensure a comfortable retirement.

With this background in mind, let’s explore the three main reasons to retire early, starting with financial necessity.

Reason 1: Financial Necessity

For many seniors, claiming Social Security early is a matter of financial necessity. Let’s examine why this might be the case.

The Reality of Retirement Savings in America

According to a 2021 survey by the Insured Retirement Institute, 50% of seniors have less than $50,000 saved for retirement. Even more concerning, 25% have less than no savings at all.

These figures paint a stark picture of the retirement readiness crisis facing many Americans. The Great Recession, coupled with rising healthcare costs and longer life expectancies, has made it increasingly difficult for seniors to save enough for a comfortable retirement.

Using Social Security to Cover Essential Expenses

For seniors with limited savings, claiming Social Security early can provide a much-needed source of guaranteed income to cover essential expenses like:

• Housing costs
• Groceries and other costs of living expenses
• Utilities
• Medical copays and prescriptions
• Personal loans
• Using it to start a small business

Claiming Early to Pay Off Debt or Avoid Drawing Down Savings

Another reason seniors might choose to claim Social Security early is to pay off outstanding debts, such as credit card balances or mortgages. By using Social Security income to eliminate high-interest debt, retirees can improve their overall financial situation and reduce stress.

Additionally, claiming Social Security early can help seniors avoid drawing down their limited retirement savings too quickly. By relying on Social Security income in the early years of retirement, they can give their investments more time to grow and potentially last longer.

While claiming Social Security early can provide much-needed financial relief for some seniors, it’s important to consider the long-term impact of reduced benefits.

Reason 2: Health Concerns

Health issues can significantly influence the decision to claim Social Security benefits early. Here’s how health concerns factor into the equation.

The Relationship Between Health and Retirement Decisions

According to a 2021 report from the Center for Retirement Research at Boston College, more than a third of workers retire earlier than planned due to poor health. This highlights the strong link between health status and retirement timing.

For seniors facing health challenges, claiming Social Security early can provide a financial lifeline. The guaranteed monthly income can help cover medical expenses and make up for lost earnings due to the inability to work.

Claiming Early Due to Shortened Life Expectancy

Another health-related reason for claiming Social Security early is a shorter life expectancy. If you have a family history of serious illnesses or have been diagnosed with a life-threatening condition, you may opt to claim benefits as soon as possible to maximize your total lifetime payout.

In this case, it’s important to consider the break-even age – the point at which the cumulative benefits from claiming later would exceed those from claiming early. If you don’t expect to live beyond the break-even age, claiming early may be the most financially advantageous choice.

Using Social Security to Cover Health Care Costs

Healthcare costs are a major concern for retirees, with the average 65-year-old couple expected to spend $315,000 on medical expenses in retirement, according to a 2021 report from Fidelity Investments.

Claiming Social Security early can help cover these costs, particularly if you don’t have sufficient savings or lack comprehensive health insurance coverage. The additional income can help pay for premiums, copays, and out-of-pocket expenses.

While health concerns can be a compelling reason to claim Social Security early, the long-term financial implications must be carefully considered.

Reason 3: Personal Preferences and Goals

For some seniors, the decision to claim Social Security early is driven by personal preferences and lifestyle goals. Let’s examine a few common scenarios.

The Desire for a Longer Retirement

Many seniors dream of retiring early to pursue travel, hobbies, or time with family. Claiming Social Security benefits as soon as possible can help make this dream a reality by providing a reliable income stream to support an extended retirement.

In fact, a 2021 survey by the Transamerica Center for Retirement Studies found that 29% of seniors plan to retire before age 65. For these individuals, claiming Social Security early can be a key part of their early retirement strategy.

The Fear of Missing Out on Retirement Benefits

Another reason some seniors choose to claim Social Security early is the fear of missing out on benefits. According to the SSA’s Trustees Report Summary, the trust fund is projected to be depleted by 2035, so some worry that future benefits may be reduced or even eliminated.

While it’s important to note that even with the depletion of trust funds, Social Security is projected to pay 83% of scheduled benefits after 2035, the uncertainty can drive some to claim benefits as early as possible.

The Potential for Investing Social Security Benefits

Some seniors view claiming Social Security early as a chance to invest that money, potentially achieving returns that could surpass the guaranteed 8% annual increase associated with delayed retirement benefits beyond full retirement age.

However, it’s crucial to approach this strategy with caution. Investing always carries risk, and you would need to consistently earn returns higher than 8% to come out ahead in the long run. Additionally, the guaranteed nature of Social Security benefits provides a valuable safety net that shouldn’t be discounted.

While personal preferences and goals can make claiming Social Security early appealing, it’s essential to understand the potential drawbacks before making a decision.

Potential Drawbacks of Claiming Social Security Early

We’ve looked at three reasons to take Social Security early. While there are some compelling reasons, it’s important to consider the potential downsides as well.

The Permanent Reduction in Monthly Benefits

The most significant drawback of claiming Social Security early is the permanent reduction in your monthly benefit amount. As mentioned earlier, claiming at age 62 can result in a 25% to 30% reduction compared to your full retirement age benefit.

This lower monthly payment can have a substantial impact on your long-term financial security, especially if you live longer than expected. It’s important to consider whether the reduced benefit will be sufficient to cover your expenses throughout retirement.

The Effect on Spousal and Survivor Benefits

Your claiming age can also affect the benefits your spouse is entitled to receive. If you claim early, your spouse’s spousal benefits (which can be up to 50% of your full retirement age benefit) will also be reduced.

Additionally, if you pass away first, your spouse’s survivor benefit will be based on your actual benefit amount. Thus, claiming early can result in a lower lifetime benefit for your spouse, which is an important consideration for couples.

The Tax Implications of Social Security Income

Another potential drawback of claiming Social Security early is the impact on your taxes. Depending on your other income sources, up to 85% of your Social Security benefits may be taxable.

If you claim early and continue working, your benefits may be subject to the Social Security earnings test. In 2023, if you earn more than $21,240 before you reach full retirement age, your benefits will be reduced by $1 for every $2 you earn above the limit.

When deciding when to take Social Security benefits, it’s essential to factor in the tax implications and the potential impact of the earnings test.

Making an Informed Decision

Deciding when to claim your Social Security benefits is a highly personal choice that depends on your unique financial, health, and lifestyle factors. While claiming early can provide much-needed income and flexibility for some seniors, it’s crucial to weigh the potential drawbacks carefully.

Remember, you don’t have to navigate this decision alone. Consult with a financial advisor specializing in retirement planning to help you evaluate your options and make an informed choice.

Additionally, take advantage of the resources available through the Social Security Administration, such as their retirement estimator tool and benefits calculators, to better understand how your claiming age will impact your monthly benefits.

When deciding whether to claim Social Security early retirement age benefits, it’s essential to carefully weigh the reasons for doing so against the potential drawbacks. By considering your unique needs and goals, you can make an informed decision that aligns with your financial situation. This thoughtful approach can ultimately set you up for a more secure and fulfilling retirement.