Americans who qualify for Social Security retirement benefits can choose to file as early as age 62 or as late as age 70, and have a full, or normal retirement age of 66-67 years of age depending on when they were born. Despite the wide range of options, and the permanent benefit reduction for collecting Social Security early, the most common age people start receiving benefits is as early as possible -- age 62.
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There certainly are some valid reasons for starting retirement benefits this early. For example, if people retire at or before 62 years of age (whether planned or unplanned), starting Social Security as early as possible can be a smart financial decision. Here's why many Americans start collecting Social Security at 62, and the good and bad reasons why they make this choice.
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How many people file for Social Security at 62?
According to a report by the Center for Retirement Research at Boston College, more Americans begin collecting Social Security at age 62 than any other age. 42% of men and 48% of women claim at 62, and well over half claim their retirement benefits before reaching full retirement age.
The penalty for early Social Security
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This may come as a bit of a surprise, since the effect of early retirement on Social Security benefits is a pretty large permanent reduction.
Depending on the year you were born, your full retirement age is between 66 and 67 years of age. If you decide to claim Social Security before you reach this age, your benefit checks will be permanently reduced by these percentages:
- 6 2/3% per year (5/9% per month) for up to 36 months before reaching full retirement age.
- 5% per year (5/12% per month) beyond 36 months before reaching full retirement age, as early as age 62.
So, if your full retirement age is 66, this means that your benefit will be 25% lower if you claim it at age 62. If your full retirement age is 67, your reduction will be 30%. And if you were born from 1955 through 1959, your reduction percentage will be between these two amounts.
The valid reasons for claiming early
1. Early retirement -- One good reason, and perhaps the most obvious one, to take Social Security as early as possible is because of early retirement. If you have a nice nest egg in savings and want to leave your job before your full retirement age, it can make sense to tap into Social Security early in order to start that inflation-protected income stream, and avoid tapping into your savings too much.
2. Can't afford to wait -- On the other hand, many people are forced to leave the workforce earlier than they had planned. In fact, a study by Voya Financial found that 60% of retired workers had to stop working before they expected. One-third were forced to leave their jobs involuntarily, mostly either for health reasons or job loss. Even if they had planned to wait until full retirement age or beyond, unexpected early retirees may need the income and therefore not have much of a choice.
3. Spousal or child benefit reasons -- You can read all about spousal benefits here, but in a nutshell, if your spouse didn't work, or earned much less than you did, a spousal benefit based on your work record could provide them with retirement income. Additionally, retirees with children under 18, age 18 or 19 and still in high school, or are disabled, may qualify for children's benefits. However, both of these benefit programs require the primary worker to claim benefits before spousal or children's benefits can be paid.
4. Health concerns -- Social Security is designed so that you get the same (inflation-adjusted) benefits throughout your lifetime, regardless of when you start collecting. However, this is based on actuarial life expectancies and not your personal situation. Therefore, if you aren't in great health, have a family history of premature death, or are otherwise pessimistic when it comes to your own longevity, it can be good motivation to claim your benefits early, even though it means a reduced benefit.
One bad reason people file early
As you see, there are some perfectly valid reasons Americans choose to take Social Security benefits before reaching their full retirement age. However, there is one bad reason that many people give: Because "Social Security is going broke", or some variation of that statement.
The reality is that while Social Security isn't on the most stable long-term financial footing, Americans reaching their retirement age need not worry about whether or not their benefits will be paid in the future.
At the end of 2015, Social Security had about $2.8 trillion in reserves, and ran a surplus for the year. And while we won't know how 2016 went until the Social Security Trustees report is released later this year, the projections from last year's report called for a surplus, not only in 2016, but in every year through 2019. In other words, despite what you may have heard, Social Security is taking in more than it is paying out.
The bad news is that it's not expected to last. Due to the huge number of Baby Boomers expected to retire in the coming years, Social Security is expected to run annual deficits beginning in 2020 for the foreseeable future. According to the most recent projections, the Social Security trust funds will be completely depleted by 2034, after which point, the incoming tax revenue will only be sufficient to cover about three-fourths of promised benefits.
So, to be clear, as a worst-case scenario, Social Security will have to cut retirement benefits across the board by 25% in about 17 years, unless Congress acts to bolster the program's finances.
Is Social Security's financial state a cause for concern? Yes. Is it bad enough that you should take your Social Security benefit early if you don't really want to? No.
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