You've been working your entire life, contributing to Social Security with every paycheck. Now that you've finally reached retirement age, all you want to do is start collecting those retirement benefits and enjoy your golden years. And who could blame you?
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You can file for retirement benefits as early as age 62, and 42% of men and 48% of women elect to do so, according to the Center for Retirement Research at Boston College. In 2013, only about 40% of people filing for benefits had reached their full retirement age (65 to 67 depending on what year you were born).
But just because everyone else is claiming benefits early doesn't mean you should, too. There are a few situations in which it's best to hold off for a while before taking Social Security benefits.
1. You're desperate for money
Nearly half (46%) of baby boomers say they have nothing saved for retirement, according to a study by the Insured Retirement Institute.
While you can start claiming benefits at 62, if your savings are sparse, you'd likely be better off waiting a few years more. That's because you won't receive 100% of your benefits until you reach your full retirement age, and if you claim them before that age, those benefits will be reduced. The advantages of waiting are twofold: Not only can you spend more time building up your retirement savings (rather than drawing them down), but you'll also receive bigger Social Security checks once you do start collecting benefits.
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Let's say, for example, that your full retirement age is 67, and at that age you're entitled to receive $1,400 per month (about how much the average beneficiary receives). If you were to retire at 62, your benefits would be cut by 30%, and you'd receive just $980 per month. If you were to wait until age 70 to start claiming benefits, however, you'd receive 124% of your benefits -- or $1,736 per month.
In addition, if you work an extra few years, even small contributions to your retirement fund can add up. Say you're 62 years old, earning $50,000 per year, and contributing 4% of your salary (or $2,000 per year) to your 401(k). Your employer also matches that 4%, bringing your total contributions to $4,000 per year. Assuming you earn an annual 7% rate of return on your investments, you'll have another $44,000 in your 401(k) in eight years. Combined with the extra money you'll get from Social Security, that kind of money can go a long way.
2. You have no idea how much money you'll need during retirement
Sometimes winging it and hoping for the best works out in your favor, but you shouldn't try that approach when you're planning for retirement. Unfortunately, 81% of Americans don't know how much they need to save for retirement, according to a survey from Bank of America Merrill Lynch. That's a problem, because if you don't know how much you need, you won't know whether your Social Security benefits, combined with your savings, will cover all your expenses.
To estimate how much you'll need during retirement, you can use a retirement calculator and create a budget to determine whether you will be living a more expensive or less expensive lifestyle once you retire.
The average retirement costs around $738,400 total, according to the most recent Merrill Lynch Finances in Retirement Survey. That may sound like a huge number, but if you spend, say, 25 years in retirement, that comes down to about $29,536 per year. If Social Security pays you $1,400 per month, or $16,800 per year, then the remaining $12,700 will need to come from your savings.
If your savings are falling a little shorter than you'd hoped, it's a good idea to delay taking benefits so that you'll earn bigger checks once you do claim them. It will also give you the opportunity to work a few more years and beef up your savings enough to fill the gap between what Social Security will provide and what you'll need during retirement.
3. You haven't considered healthcare costs
Healthcare is one of the biggest expenses you'll face during retirement, and many retirees (incorrectly) assume that Medicare will cover all of it. However, even with Medicare, you're still responsible for paying deductibles, copayments, and coinsurance. It also doesn't cover certain expenses, such as most dental care, prescription eyeglasses, and long-term care.
The average 65-year-old couple retiring today can expect to pay over $275,000 in healthcare costs during retirement, which is more than what the average person has saved for retirement altogether.
Waiting a few years to claim benefits can help offset these costs in a couple ways. First, you're not eligible for Medicare until you turn 65, so if you're able to work at least that long and remain covered under your employer's healthcare plan until then, that can save you from having to find insurance on your own (which will likely be expensive).
Even an extra couple hundred dollars per month can go a long way toward covering healthcare costs. For example, the average American spends about $1,370 per year on prescription drugs -- or around $115 per month. By waiting to claim benefits for just a year or two, the extra amount you'd earn in benefits could cover this entire cost, leaving you more money to use for "fun" expenses.
As you're nearing retirement age, it's understandable to want to give yourself a head start to enjoy as much time as possible in retirement. But the last thing you want is to spend your golden years worrying about money. Waiting just a few more years to claim Social Security, although not very fun, may be a wise decision in the long run.
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