If someone were to offer you $70 now or $100 in five years from now, which option would you take? Chances are, you’d grab your $70 and head along on your merry way. Well, you might land in a similar boat in the context of claiming Social Security, only with much, much higher stakes.
You’re allowed to sign up for Social Security as early as age 62. But if you file for benefits ahead of full retirement age (FRA), they’ll be reduced on a permanent basis.
If you were born in 1960 or later, FRA for Social Security purposes is 67. And filing for benefits at 62 will mean facing a 30% reduction — for life.
Now you may be willing to take that hit to get access to your money sooner. But before you do, make sure to run one key calculation.
How much monthly income will you get from your savings?
Let’s say you’re eligible for $2,000 a month in Social Security at an FRA of 67. You may decide that you’d rather file for benefits at age 62, even if that means limiting yourself to $1,400 a month.
Before you can make that choice, though, it’s important to see how much monthly income you’re able to get from your savings. If that number is smaller than expected, then you may want to reconsider your early Social Security filing.
Let’s say you’re kicking off retirement with $500,000 to your name. That’s clearly a lot of money. But let’s say you plan to limit withdrawals from your savings to 4% a year. That’s $20,000 in annual income and about $1,667 in monthly income.
If you expect your monthly retirement expenses to total about $3,000 a month, then you may be good to go with your decision to claim Social Security at 62 and collect $1,400 from the program on a monthly basis. But let’s say you expect to need more like $3,500 a month to cover all of your expenses. In that case, filing at 62 reads like a pretty poor choice.
Look at the big picture
You might have access to income in retirement beyond Social Security and savings. If you’re planning to work, for example, that might result in an extra $500 a month or more (though keep in mind that you might, eventually, reach a point where holding down a job isn’t feasible due to health or mobility issues).
Similarly, let’s say you’re not planning to downsize in retirement, but instead, rent out the lower level of your home. If that’s likely to result in $800 a month in rent, you’ll want to consider that income, too.
It’s important to look at all of your income sources before claiming Social Security. But don’t make the mistake of checking your 401(k) or IRA balance, seeing a large number on your most up-to-date statement or laptop screen, and assuming you’re all set to claim Social Security early.
Even a strong retirement plan balance might translate to less yearly and monthly income than expected. So be sure to run those numbers before making your Social Security filing official.