Key Points
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Filing for Social Security early will mean reducing your monthly benefits for life.
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You could be looking at a 30% hit.
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Beyond that, an early claim could have a big impact on your savings.
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There’s a reason seniors are told to think carefully before signing up for their Social Security benefits. The age at which you file your claim will have a direct impact on the amount of money Social Security pays you each month.
Filing for Social Security at full retirement age (FRA) means you’ll avoid any sort of reduction to your monthly benefits. FRA is 67 for people born in 1960 or later.
However, you’re allowed to claim Social Security once you turn 62. And the further away from FRA you are, the more of a hit to your benefits an early filing will cause.
For example, if you claim Social Security a year early, you’ll reduce your benefits by about 6.67% But if you claim Social Security at 62 with an FRA of 67, that’s five years early, and it will result in a 30% reduction.
On the flipside, if you delay Social Security past FRA, your monthly benefits get to increase 8% per year until you turn 70.
However, waiting on Social Security is a tough thing. It could mean having to work longer than you want and having to put off the retirement goals you’ve always dreamed of. So you may be more inclined to file for benefits early rather than late.
But you should know that claiming Social Security early could have a huge financial impact on your retirement. And that’s not just because of the reduced monthly benefits you’ll be left with.
An early claim could affect your savings
It’s not a given that people who claim Social Security early also stop working right away. In fact, you’re allowed to collect Social Security while also getting paid from a job.
But if you file for Social Security before FRA while you’re still working, you’ll be subjected to income limits. And exceeding those limits could mean having some of your Social Security withheld.
Plus, the fact of the matter is that a lot of people claim Social Security early so that they can retire at the same time. But that could mean missing out on years of retirement plan contributions and needing to stretch your savings longer.
Let’s say you reach age 62 with $1 million in your 401(k). That’s not a small amount of money. But if you were to work an extra five years, all the while contributing an additional $15,000 per year to your 401(k) and earning a conservative 5% return, you’d be looking at about $1.36 million instead.
That could make a big difference in the context of your retirement spending. That extra $360,000 could result in more annual income plus give you a cushion in case surprise expenses like home repairs pop up.
Talk to a professional before claiming Social Security early
It’s not automatically an unwise choice to sign up for Social Security early. If you have a nice nest egg, for example, as well as a stressful job, an early claim could be your ticket out of a bad work situation you deserve to escape. And if you’ve saved enough that you don’t need to worry about the reduction in benefits, there’s not so much of an issue.
But before you claim Social Security, it’s a good idea to consult with a financial advisor and talk through your options. They can show you the impact of taking benefits at different ages so you can make a more informed decision.
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