Developing the right strategy for claiming Social Security is more important than you’d expect. Your benefits are going to be a critical source of income in your senior years, and you want to make the most of them since they’re guaranteed to last for life and since there are cost-of-living adjustments built in so inflation doesn’t cause you to lose buying power over time.
But what is the right strategy? That’s more complicated than you might think.
In fact, there’s one approach that seems on the surface like it would make good sense, but that actually ends up not being the right move for most people. Here’s what it is, along with some details on why doing the math can reveal the flaw in this approach to claiming.
Don’t make the wrong Social Security claiming move
For many people, one of the most obvious Social Security strategies is to claim Social Security as soon as you become eligible at 62.
This is the approach preferred by Dave Ramsey. Many retirees also believe it’s the right move because you get your benefits as soon as possible, and you don’t have to worry about breaking even for a delayed benefits claim. Those who fear that Social Security benefits are going to run out as a result of financial instability may also believe that a claim at 62 is the best move for them, since they can get their money while full benefits are still available.
The only problem is, when you actually run the numbers and do the math, you’ll discover that you give up a lot as a result of an early claim. Not only do you get less income each month, but you also risk getting substantially less income over the course of your life.
Running the math shows the flaw in this Social Security claiming strategy
When you take a close look at the impact of an early Social Security claim, it becomes easier to see why it may not be the best approach for many seniors.
See, if you claim your Social Security benefits before your full retirement age, your benefits shrink. They are reduced by 5/9 of 1% for each of the first 36 months you’ve started ahead of your FRA. When you claim more than 36 months before FRA, you face an additional reduction of 5/12 of 1% per month. There’s also no opportunity to earn the delayed retirement credits that would be available if you waited to start Social Security until after your full retirement age.
How much does this cost you, exactly? If your standard benefit was on track to be around $2,000, a claim at 62 with an FRA of 67 would subject you to five years of early filing penalties. That’s a 30% reduction, leaving you with just a $1,400 monthly benefit. By contrast, a delay until 70 with an FRA of 67 would have increased your monthly benefits by 24% and left you with $2,480.
Of course, you give up eight years of potential benefits to earn the extra $1,080, but this is where doing the math comes in. Passing up eight years of $2,000 benefits means missing out on $192,000 in Social Security income. To make up for that with your extra $1,080 per month, you have to collect Social Security for 177.78 months. That’s 14.81 years.
The thing is, though, that many people are going to live long enough to do that. It’s not unreasonable to expect to live until 84, and a growing number of people are doing so as lifespans get longer. In fact, research has actually shown that for current workers, 90% will end up better off by delaying their benefits claim because they’ll live long enough to do better than break even for a delayed claim.
You need to run this math, find out your break-even age, and consider your health situation as well as whether a spouse will likely depend on survivor benefits. This will help you decide if a delayed claim makes sense for you. For many, it’s a much better approach than an early claim, so if you’re considering starting benefits at 62 really take the time to explore the implications of doing so before you act.
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