Though your Social Security benefits are calculated based on your personal earnings history, the age at which you first file for them can dictate how much money you actually receive month after month. If you wait to take benefits until your full retirement age (FRA), as determined by the Social Security Administration, then you'll get the full monthly payment your work history entitles you to. File ahead of FRA, however, and you'll face a reduction in your monthly benefits that will remain in effect for the rest of your life (unless you manage to go in and undo your application in time).
Now the extent of that reduction will depend on how early you file. Recipients are allowed to start taking benefits at 62, which is anywhere from four to five years ahead of FRA depending on your year of birth.
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So let's say your FRA is 67 and you claim benefits as early as possible. Doing so will shrink them by 30%; if you were initially entitled to $1,500 a month, you'll collect just $1,050 a month instead. That, in turn, could negatively impact your lifestyle in retirement, which is why you'll often hear financial experts warn that it's important to file for Social Security on time or even after FRA.
But new data from the Journal of Aging Studies reveals that taking benefits early tends to work out for seniors who go that route. In a recent survey of older Americans, roughly 45% filed for Social Security at 62, while 65% claimed benefits before reaching FRA. Yet the majority of those who took benefits early did not end up regretting that choice, despite understanding the financial benefits of waiting longer to file. And that's perhaps good news for the countless Americans who will one day toy with the idea of filing for Social Security sooner rather than later.
When it pays to file early
Though claiming Social Security ahead of schedule does come with the major drawback of losing out on monthly income, there are some circumstances under which it makes sense. In the aforementioned study, cash flow issues and longevity concerns were the major drivers of recipients' decision to file early, and they're both valid reasons to avoid waiting on benefits.
First, let's talk money problems. If you happen to find yourself laid off in your early to mid-60s, or have a need for cash that your paychecks and savings can't cover, then it actually makes more sense to file for Social Security than to rack up costly credit card debt to keep up with your expenses. Going the latter route will put you at risk of damaging your credit, thereby restricting your borrowing options later in life.
If your need for cash is a temporary one, then claiming Social Security early can work out quite well, because you can always collect your benefits, undo your application within a year if your situation improves, repay the money you received, and file again at a time when your benefits won't be reduced. Even if you never manage to get that do-over, you're still generally better off taking your benefits than resorting to debt when the need for money arises.
Then there's longevity to consider. The interesting thing about Social Security is that it's actually designed to pay you the same total lifetime benefit regardless of when you first file. The logic is that any reduction you face by filing early will be offset by the larger number of individual monthly payments you collect, and vice versa -- filing on time won't shrink your payments, but you'll collect fewer. This formula, however, assumes that you live an average lifespan; if your health is notably poor, you might end up getting more out of Social Security over your lifetime by filing early.
Imagine you're looking at a full monthly benefit of $1,500 at an FRA of 67. If you file at 62, you'll reduce each payment you collect to $1,050, as stated above. If you live until 78 1/2, however, you'll wind up with roughly the same lifetime total regardless of whether you claimed benefits at 62 or at 67. But watch what happens if you pass away at 75: Suddenly, you're coming out almost $20,000 ahead by filing for benefits at 62 rather than waiting until 67.
Though it's never pleasant to contemplate one's mortality, the fact of the matter is that having major health issues is a legitimate reason to claim benefits ahead of schedule. Just consider the impact that move might have on your survivors, if you have any, since their benefits are based on the amount you collect.
Finally, keep in mind that when we talk about claiming Social Security early, there's a major difference between taking benefits at 62 and taking them at a later age. If your FRA is 67 and you file at 65, you'll face much less of a hit than you would by filing at 62, which might help make the decision easier.
Of course, there are good reasons to file for Social Security at your full retirement age or later and avoid a reduction in benefits. But rest assured that if you do end up claiming benefits ahead of schedule, it just might work out for you in the end.
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