If you’re planning to tap into your Social Security benefits at age 62, make sure you fully understand the risks before making your move.
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For many Americans, Social Security is the cornerstone of retirement income. Nearly 90% of people over age 65 receive benefits from the program, according to the latest data from the Social Security Administration (SSA), and those monthly checks provide about one-third of all retirement income nationwide for those over age 65. But while the Social Security safety net is critical, when you choose to claim those benefits can make or break your financial picture later in life.
While the SSA allows you to claim Social Security benefits as early as age 62, waiting until your full retirement age, which is between 66 and 67 depending on your birth year, or even up to age 70, typically means you’re getting a much larger monthly benefit in return. Still, a significant portion of those eligible for Social Security benefits file at age 62, driven by either the desire to retire early or the need for extra income in their early 60s.
The problem with that, though, is that claiming too early comes with some very real risks that can have lasting financial consequences. So, there are a few things you need to consider before locking in Social Security benefits at the earliest possible age.
Find out how an annuity can help fill in the gaps left behind by your Social Security benefits.
3 risks that come with claiming Social Security benefits at age 62
While the idea of getting a check as soon as you’re eligible might sound appealing, it’s important to weigh the downsides carefully. Here are three major risks of claiming Social Security at 62:
Your monthly benefit will be permanently reduced
When you claim Social Security at 62, you’re not just taking a temporary haircut on your benefits. You’re also accepting a permanent reduction that will never go away. The Social Security Administration reduces your benefits by about 6.7% for each year before your full retirement age.
This means if your full retirement age is 67 and you claim at 62, you’ll receive only about 70% of your full benefit amount for the rest of your life. Even more concerning, though, is that this reduction also affects any cost-of-living adjustments (COLAs) you receive in the future. Since COLAs are calculated as a percentage of your current benefit amount, starting with a smaller base means smaller increases over time, compounding the financial impact year after year.
Learn how an annuity can help you lock in a guaranteed retirement income stream.
You miss out on delayed retirement credits
Perhaps even more costly than the early claiming penalty is what you miss by not waiting until after your full retirement age. For every year you delay claiming benefits beyond your full retirement age until age 70, you earn delayed retirement credits worth 8% annually. This means someone with a full retirement age of 67 who waits until 70 to claim will receive 124% of their full benefit amount.
For someone entitled to $2,000 per month at full retirement age, then, waiting until age 70 would result in monthly payments of about $2,480, which is about $1,080 more per month than you’d get by claiming at 62. Over a 20-year retirement, this difference amounts to nearly $260,000 in additional benefits. These delayed retirement credits stop accruing at age 70, though, so there’s no benefit to waiting beyond that point.
It could result in reduced survivor benefits for your spouse
Your claiming decision doesn’t just affect you. It can also have lasting consequences for your surviving spouse. When you die, your spouse may be eligible to receive survivor benefits based on your earnings record. However, if you claimed early and reduced your own benefits, you’re also reducing the potential survivor benefits your spouse could receive.
This is particularly problematic for couples where one spouse has earned significantly more than the other. The higher-earning spouse’s claiming decision will determine not just their own benefits, but potentially their spouse’s financial security by impacting their survivor benefits. In many cases, the optimal strategy involves the higher earner delaying benefits to maximize both their own payments and the eventual survivor benefit.
How to delay claiming your Social Security benefits
If you’re tempted to file at 62 because you need income, there are practical ways to bridge the gap until you reach full retirement age, or even age 70, so you can maximize your Social Security. Here’s what to consider:
Tap retirement savings first. Using money from a 401(k) or individual retirement account (IRA) to cover the early years of retirement may allow you to delay claiming and secure a bigger Social Security check later on. Consider an annuity. Purchasing an annuity can create guaranteed monthly payments that fill the gap until you claim Social Security. This option provides income you can rely on while allowing your eventual Social Security benefits to grow.Explore your home equity options. A reverse mortgage, for example, can give you access to your home’s value without requiring monthly payments, providing a financial bridge while you delay claiming benefits. Work part-time. If you’re still able and willing, scaling back instead of fully retiring can provide enough income to postpone claiming benefits without draining your savings.The bottom line
Claiming Social Security at 62 may feel like the natural next step once you hit that milestone birthday. The decision comes with big tradeoffs, though, including smaller monthly checks, greater risk of outliving your money and complications if you continue to work. But delaying your benefits by even just a few years can dramatically increase your financial security in retirement. As you weigh your options, just be sure to keep in mind that a bigger Social Security check isn’t just about more money today. It’s about peace of mind for decades to come.