There are certainly some good reasons to claim Social Security early. Maybe you've saved enough money and are in a strong financial position to retire early. Maybe your spouse or children are also entitled to benefits on your work record and it makes sense to start as soon as possible. Or, maybe you're in poor health and want to claim as soon as you can.
All of these can be valid reasons to claim Social Security benefits before you reach your full retirement age. However, some of the reasons retirees use for claiming Social Security early aren't quite as good. Here are three examples of the wrong reasons to claim Social Security before age 66 or whatever your full retirement age is.
1. "Social Security is going broke"
There are many exaggerations going around about Social Security's financial state. Maybe you've heard that Social Security is going broke, or that the government raided Social Security's reserves and there won't be anything left to pay in a few years.
Here's the truth: Social Security isn't in the best financial condition from a long-term perspective. However, for the time being, it's just fine. Social Security has $2.85 trillion in reserves (no, it wasn't "stolen" by the government), and is expected to run a surplus every year through 2022.
Beyond that point is where the good news ends. Social Security is expected to start running deficits after that year, and its reserves are expected to be completely depleted in 2034.
The most important takeaway is that even if Social Security runs out of money, the incoming payroll taxes will still cover more than three-fourths of benefits. Under no circumstances would your Social Security checks simply stop coming.
Furthermore, history tells us that something will be done. The problem can still be fixed through mild tax increases, certain forms of benefit reductions (such as a higher full retirement age), or some combination of the two. The bottom line is that claiming Social Security early out of fear that the program will collapse is simply a bad idea.
2. "I want to get my paycheck and a Social Security benefit for a few years"
If you aren't too familiar with the details of the Social Security program, you may not have heard of the "earnings test." And if you haven't, it might seem like a smart idea to claim Social Security early in order to get your paycheck and a Social Security check for your last few working years.
However, the Social Security earnings test may prevent this from being possible. In a nutshell, if you haven't yet reached full retirement age and are still working, your Social Security benefits can be withheld if you earn more than a certain amount.
Here are two rules for 2018 that can tell you if you'll be affected by the Social Security earnings test:
- If you will reach full retirement age after 2018, $17,040 in earnings ($1,420 per month) will be excluded from consideration. Beyond this threshold, your retirement benefits can be reduced by $1 for every $2 in excess earnings.
- If you will reach full retirement age during 2018, $45,360 in annual earnings ($3,780 per month) are excluded. Beyond this threshold, your retirement benefits can be reduced by $1 for every $3 in excess earnings. For this test, only the months before you reach full retirement age are considered.
To be clear, any money that's withheld from your Social Security checks because of the earnings test isn't necessarily lost. Once you reach full retirement age, withheld money can be applied to permanently increase your benefits. However, the point is that in the near term, you may not be able to enjoy your full Social Security benefit and your paycheck.
3. "I want to leave my retirement savings alone as long as possible"
Many early retirees claim Social Security early in an effort to leave their savings alone as long as possible. In other words, they'll live mainly off their Social Security benefits for their first few years of retirement in order to allow their 401(k), IRAs, and other retirement savings accounts a few more years to grow.
I would argue that the exact opposite strategy makes more sense.
For starters, consider that there's no guarantee that your retirement accounts are actually going to grow. Awful market crashes have happened before and will certainly happen again at some point -- it's just a question of when.
Let's say that you retire at age 62 and claim Social Security and leave your 401(k) alone until you're 66. Well, if the stock market crashes within those four years, there's a real possibility that you could end up with a smaller retirement nest egg and a permanently reduced Social Security benefit.
On the other hand, Social Security is a guaranteed, inflation-protected retirement income stream, so it makes sense to allow it to grow for as long as possible. Depending on how long you wait, your Social Security benefit can permanently increase by as much as 8% for every year. And the higher your initial benefit is, the more of a "raise" you'll get each year as a cost-of-living adjustment, or COLA.
So, it's best to let both your retirement savings and Social Security benefit to grow for as long as possible. However, if you need income early, it can be a smarter idea to tap into your retirement savings and allow your Social Security benefit to get larger.
It makes a big difference
Claiming Social Security early can be a smart move for many people -- after all, the vast majority of beneficiaries start collecting Social Security at or before their full retirement age. However, there are good and bad reasons to claim early, and it's an incredibly important financial decision. If your full retirement age is 67, claiming Social Security at 62 results in a permanent 30% benefit reduction. So, it's important to learn as much as you can about how Social Security works in order to make the best decision for you and your family.
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