Once retirement rolls around, you may have some tough decisions to make. Should you downsize your home? Should you get rid of one of your cars to save on the costs? And what sort of Medicare plan should you enroll in?
But perhaps the toughest decision you might face is when to sign up for Social Security.
The earliest age to claim benefits is 62. But if you file for Social Security at your full retirement age (FRA), which is anywhere between ages 66 and 67, depending on your year of birth, you’ll be guaranteed your complete monthly benefit without a reduction.
It can be very tempting to claim Social Security at 62, or at some point ahead of FRA. But financial expert Suze Orman warns that doing so could be dangerous. And she’s right.
The problem with claiming Social Security early
In a LinkedIn post, Orman wrote, “Don’t settle for a reduced Social Security benefit. If you are in good health, the best financial move you can make is to not claim Social Security before you reach your Full Retirement Age.”
There’s a reason Orman included that caveat about being in good health.
If your health is poor going into retirement, then it may actually make sense to claim Social Security early, despite the fact that doing so will reduce your payments on a monthly basis. If you don’t live a long life, an early claim might put more total income in your pocket.
However, Orman insists, if you’re healthy and believe you’ll live a reasonably long life, then you may be better off claiming Social Security at FRA to avoid a reduction in your monthly payments.
If you don’t have a lot of savings, your nest egg might eventually run out on you. But Social Security is guaranteed to pay you your monthly benefits for life. So the more money you’re able to lock in from the start, the more financially stable your senior years might be.
In fact, you may decide to delay Social Security past FRA for larger monthly checks. Each year you wait, until you turn 70, gives your benefits an 8% boost for life.
A hit you may not be able to afford
To illustrate the danger of claiming Social Security early, let’s say you’re eligible for a monthly benefit worth $2,000 at an FRA of 67. If you file for Social Security as early as possible at the age of 62, you’ll reduce your monthly payments by 30%, or $600, leaving you with $1,400 a month instead.
Now, imagine having to settle for $600 less income per month for the rest of your life. That could become problematic if your healthcare costs increase or your general expenses go up and you don’t have enough income to keep up.
This isn’t to say that claiming Social Security ahead of FRA never makes sense. If your parents died young due to familial health issues and you’re worried you’ll end up in the same situation, then it could pay to take benefits early. But if there’s no reason to expect a shortened lifespan, then waiting could be the smarter move financially.
Of course, before you make any moves in the context of Social Security, it’s a good idea to sit down with a financial advisor and see what they think. An advisor can look at various factors, including your income needs, savings, and goals, to help you land on a filing age that’s right for you.
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