Many Americans fear for the future of Social Security, and this could be leading them to make some bad choices.
In fact, one recent study showed 44% of people think Social Security is going to run out of money before their retirement. This is one reason more than four in 10 people indicate they plan to claim Social Security between the ages of 62 and 65. By contrast, just 10% plan to wait until 70.
While it may seem smart to collect benefits ASAP in such a scenario, this is actually the worst possible reason to claim Social Security early. Here’s why.
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Don’t claim Social Security early for the wrong reasons
Making decisions related to Social Security because of a fear you won’t get any benefits at all is a short-sighted choice that could cost you thousands of dollars. There are a few reasons for that.
Despite popular belief, Social Security is not in danger of running out of money. It has a steady revenue stream that comes from current workers’ payroll taxes. This is not going to stop happening unless everyone in the U.S. stops working or unless the funding mechanism is changed — which is extremely unlikely to occur.
It is true, however, that Social Security’s trust fund is in danger of depletion by 2033. But if that happens, there would still be enough money coming from tax revenue to pay about 77% of the benefits promised. That’s a hit, but it doesn’t mean you won’t get any of your retirement funds
It’s also extremely unlikely lawmakers are going to let retirees — a very powerful voting bloc — see a huge reduction in their income like that. It’s more likely Congress is going to take some action to shore up Social Security. While this may involve changes to the program like increasing full retirement age (FRA), these modifications will probably be phased in over a long time and aren’t likely to impact anyone currently in or close to retirement.
Claiming Social Security early guarantees a smaller monthly check
The reality is, an early Social Security claim is going to mean you definitely get a smaller monthly benefit.
That’s because you will get hit with early filing penalties if you claim before FRA. These could shrink your monthly checks by as much as 30% depending on how far ahead of schedule you start payments. And if you wait until FRA but not until age 70, you’ll pass up delayed retirement credits that increase your monthly benefit up to 8% for each full year that you delay payments.
You do give up income by waiting to get benefits, but the majority of retirees are better off waiting until 70 because the larger monthly checks from claiming at that age add up to higher lifetime income from Social Security.
So, unless there are clear reasons why you want your benefits early — such as concerns about your health or a desire to retire early that hinges on Social Security — you should think very carefully before you make that choice. And definitely don’t claim benefits prematurely out of fear of a future without them as that’s unlikely to happen.
