One of the toughest financial decisions you might have to make in your lifetime is deciding when to sign up for Social Security. The earliest point you can claim benefits is age 62. But waiting beyond that point results in larger monthly checks for the rest of your life.
If you were born in 1960 or later, full retirement age for Social Security is 67. That’s when you can collect your monthly benefits without any sort of reduction. And if you delay Social Security past full retirement age, your benefits increase 8% per year you do so, up until you turn 70. At that point, there’s no sense in delaying your claim.
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But if you like the idea of getting Social Security as soon as possible, you may be inclined to sign up at 62 — even though that might mean reducing your benefits by 30%, compared to filing at 67. Before you make that decision official, though, there’s an important calculation you’ll need to perform.
Figure out how much income your savings will give you
Ideally, you’ll be bringing some savings with you into retirement. Before you lock in smaller Social Security benefits each month by claiming them at 62, you’ll need to figure out what your retirement expenses will amount to, and how much income your savings will give you.
Let’s say you determine you’ll need $60,000 a year to cover your expenses in retirement. Let’s also say you have a $750,000 nest egg. If you use the 4% rule to manage your savings, that amounts to $30,000 a year in retirement plan withdrawals, not accounting for adjustments you make for inflation.
Meanwhile, let’s say you’re entitled to $2,500 per month from Social Security at full retirement age. If you sign up then, you’ll get $30,000 a year from Social Security, plus $30,000 from savings, bringing you to the $60,000 you need to cover your costs.
But if you sign up for Social Security at 62, you’ll slash your monthly payments from $2,500 to $1,750. And you’ll reduce your annual Social Security income to $21,000.
Combined with your $30,000 from savings, you’re then only at $51,000, leaving you with a pretty notable shortfall. And while you could potentially make up the difference by cutting expenses or working part-time, the nice thing about waiting on Social Security is that it’s a guaranteed means of boosting your income. You never know if you’ll be able to work, or if certain expenses of yours, like healthcare, will increase despite your best efforts to lower them.
A decision you can’t jump into
It’s easy to see why claiming Social Security at 62 is appealing. It’s hard to say no to money that’s available to you sooner rather than later.
But before you sign up for Social Security at 62, run the numbers to see if you can afford the hit to your monthly benefits. You may find that waiting to file is essential if you want to avoid financial stress throughout retirement.
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