Social Security benefits become available for retirees as early as age of 62, but benefits are reduced if you claim them before full retirement age (FRA). Despite the fact benefits could be reduced by as much as 30% if you claim benefits at 62 instead of FRA, 62 is the most popular age to claim Social Security.
Your reduction in benefits for claiming early is permanent, so your monthly income during retirement could be hundreds of dollars lower than it would be if you'd waited. And, claiming benefits early also means you miss out on the chance to earn delayed retirement credits that could be earned up until age 70 if you wait until after FRA to claim benefits.
So, why do so many people claim Social Security benefits at 62 instead of waiting longer? Here are three key reasons.
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1. Poor health means claiming early makes sense
While claiming Social Security benefits means you'll receive a smaller monthly income, this doesn't always mean the total amount of benefits received will be smaller. When you delay claiming Social Security benefits, you miss out on years of income and it takes time to break even from foregone benefits.
If you don't think you'll live long enough that your higher monthly Social Security benefits equal or exceed what you're receiving from Social Security during the early years of retirement, claiming early actually makes financial sense. Of course, it's impossible to predict the future, but if you're in poor health or if people in your family generally pass away early, claiming Social Security at 62 may be a financially sound strategy.
You can use this chart to give you an idea of how long it will take you to break even for delaying benefits, or do some simple math to calculate your break-even point based on your own projected benefit amount.
However, if you're married, you also have to consider your spouse. The death of a spouse is a major financial shock for many retirees. The Center for Retirement Research estimates that while a widow needs around 79% of the couple's combined income to maintain the same living standard after a spouse's death, widows typically are left with just 62% of combined income.
If your income is higher than your spouse's and you delay claiming Social Security, your spouse can receive a higher survivor's benefit than if you'd claimed at 62.
2. Forced early retirement makes claiming early a necessity
Although 62 is the most popular age to claim benefits, most people don't actually want to retire young. In fact, according to Employee Benefit Research Institute, four in 10 workers want to wait until at least age 70 before retiring, compared with only 26 percent of workers who want to retire before age of 64. Unfortunately, just four percent of current retirees were actually able to keep working until 70 or later, while 77% of current retirees left the workforce before age 65.
Primary reasons for leaving the workforce early included company restructuring that left a worker with no job, disability, or health problems. Just under a quarter of workers actually retired early due to the fact they could afford to do so; the rest were forced out.
If you're forced out of work before you're ready, you may have no choice but to claim Social Security so you'll have money. However, while it's common for workers to claim their Social Security benefits at 62 because they can't work any longer, those who have to leave work should consider applying for unemployment or Social Security Disability to delay claiming retirement benefits until full retirement age.
Saving in a 401(k) or IRA throughout your career could also give you a large enough nest egg to live on while you delay claiming Social Security benefits until you're older and benefits increase. While it can be hard to save enough for a secure retirement -- especially if you're forced to leave the workforce early -- finding ways to cut spending can help. Driving older used cars you pay for with cash instead of taking a car loan is one key way to save more for retirement.
3. Lack of faith in Social Security prompts early claims
Around 78% of future retirees worry funding for Social Security benefits will run out during their lifetimes. Fear of a financial shortfall in the Social Security program can prompt workers to claim benefits as soon as they can, while they can.
In reality, however, Social Security retirement benefits are funded through both payroll tax contributions from current workers as well as the Social Security trust fund. While it's true the trust fund is expected to run short in 2034, Social Security will still be able to pay out around 77% of promised benefits.
And that's assuming that politicians allow such drastic benefits cuts to be made, despite the fact fixing Social Security to protect benefits is significantly more popular than allowing benefits cuts to go through -- even if fixes require tax increases.
It's very unlikely politicians would allow a major cut to Social Security benefits, so current and future retirees shouldn't make Social Security claiming decision based on a belief benefits are going to disappear.
Don't claim Social Security benefits at 62 unless it makes financial sense
Claiming Social Security benefits at 62 isn't always the wrong choice -- there are times when claiming early makes sense.
But before you claim your benefits, make sure you understand how an early claim will reduce income and how an early claim could impact your spouse. When you know the rules for Social Security benefits, you can make the right choice to maximize the total benefits you'll receive.
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