Some people believe in starting to collect Social Security as early as possible, which is generally at age 62.
“Live while it is yet possible to live!” the early birds cry. “After all, I could die tomorrow, and then the government will keep my money.”
What’s more likely is that you’ll live a lot longer than 62.
According to the Social Security Administration (SSA), the average woman reaching the age of 65 today will live until about age 87. The average man who is 65 today can expect to live until about 84.
One way to help ensure you don’t run out of money before then is to postpone claiming your Social Security retirement benefits. There are advantages to waiting as late as age 70.
While waiting until 70 isn’t for everyone, following are some reasons that claiming sooner than later can be a bad idea.
1. Claiming early reduces your benefit
Some people think that taking Social Security at age 62 means more years and thus more money overall. That’s not necessarily true.
The amount of your monthly benefit is based on a formula that’s meant to be actuarially neutral. That basically means you should get the same total amount of benefits over the course of your retirement regardless of the age at which you first claim benefits.
Your monthly benefit will be reduced if you claim before reaching what the SSA calls your “full retirement age,” an age set by the SSA that depends on the year you were born. For example, full retirement age for a person born in 1955 is 66 years and 2 months, while full retirement age for anyone born in 1960 or later is 67.
If you delay claiming until after your full retirement age, you will receive an even bigger monthly benefit once you do claim. For every year you hold off past full retirement age until age 70, your benefit will grow by as much as 8%.
The SSA’s “Quick Calculator” can give you a rough idea of your own benefit amount based on when you plan to retire.
A custom analysis of your claiming options, offered by specialized companies like Social Security Choices can further help you determine the best time for you to claim your benefits.
Money Talks News founder Stacy Johnson himself got an analysis from Social Security Choices. To learn more about such a report — including how to land a discount on the cost of your report — check out “A Simple Way to Maximize Your Social Security.”
2. You might outlive your other retirement income
If there’s a chance that you could use up your retirement funds before you die, a higher Social Security benefit could be crucial.
Getting every last dollar you can in your monthly benefit is important, especially if you don’t have a partner who’s also receiving benefits.
3. Working longer can increase your benefit
Your monthly benefit amount is based on the amount of income you earned during each of your 35 highest-earning working years. However, not everyone is able or willing to work for 35 years, often due to health or family issues.
When that’s the case, the government will substitute zeroes for the missing years in its calculation, which can significantly lower your monthly benefit amount.
Low-earning years also bring down the total, says Emily Guy Birken, author of “Making Social Security Work for You.”
As tempting as early retirement can be, think big-picture and look for ways to bring in more bucks before claiming.
“Anything you can do to replace those zeroes and anything you can do to replace those low-earning years will help beef up your retirement,” Birken tells Money Talks News.
4. COLAs will not boost your benefit as much
A lower monthly benefit means that each cost-of-living adjustment (COLA) — the inflation-based regular increase to your monthly benefit amount — will result in less money than it would have if you had postponed claiming Social Security.
Why? COLAs are a percentage of your monthly benefit. So, the smaller your benefit amount, the smaller your COLA dollar amount.
A 2% COLA, for example, would increase a $2,000 benefit by around $40 a month, or $480 per year. But it would increase a $2,480 benefit by about $49.60, or $595.20 per year.
5. You might stiff your spouse
Working at least until your full retirement age gives your husband or wife a better chance at a reasonably comfortable retirement if you die first.
That’s because widows and widowers often can benefit from Social Security survivors benefits, which are based on their spouse’s benefit amount.
Using the same benefit amounts as above, say a man gets a $2,000 benefit, while his wife’s check will be $1,700 upon her own retirement. If he dies first, she could be eligible for up to $2,000 in monthly benefits. But if he’d waited a few years to claim Social Security, and let his benefit amount grow, she could have been eligible for up to $2,480.
6. You might be hit by a ‘tax torpedo’
Some people want to let their portfolios grow, so they take Social Security early and live on it until they’re forced to withdraw required minimum distributions (RMDs) from their retirement accounts.
This plan can backfire, though, because of how Social Security benefits are taxed.
The extent to which your benefits are taxable is based on what the SSA calls your “combined income.” It includes taxable income, such as withdrawals from tax-deferred retirement accounts like traditional 401(k) plans and traditional individual retirement accounts (IRAs).
Depending on the amount of your combined income, up to 85% of your Social Security benefit could be taxed.
One way to dodge such a tax torpedo is to withdraw less money from your tax-deferred retirement account each year. And delaying claiming Social Security can help you do that because you’ll get a bigger monthly benefit.
In turn, Birken explains:
“You won’t need to take as much from your taxable retirement [plan] to make up the amount you need to live on.”
Some people don’t realize they might have to pay taxes on their benefits. Birken calls it “one of the really nasty surprises about Social Security.”
For more ways to keep Uncle Sam from taking part of your benefits, check out “5 Ways to Avoid Taxes on Social Security Income.”
7. You still like your job
Just because you’re old enough to retire doesn’t mean you have to retire.
Even a part-time salary — plus any other retirement benefits — could cover expenses until you hit age 70, at which point your Social Security benefit would be maximized.