Starting Social Security benefits too soon could lead to big regrets later in retirement. Watch out for these three signs you're making a mistake.
Once you have claimed your Social Security benefits, it's really hard to undo your decision. You have a few options, like rescinding your claim within the first 12 months and paying back all the benefits you've received. Unfortunately, however, it's not really practical for most people to do that.
Since the choice is so hard to revoke and it has a major effect on your financial future, you don't want to claim too soon. To ensure that doesn't happen to you, watch for these three big signs that you aren't really ready to start your Social Security checks just yet.
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1. You don't have a plan to provide supplementary income
The biggest sign that you are not yet ready to claim Social Security is if you haven't figured out where the rest of your income is coming from.
The truth about Social Security benefits is that they are absolutely not sufficient to be your sole source of support. You cannot rely on these benefits alone to pay for your costs as a retiree. They are designed to only replace 40% of what you were earning, and that's not enough. No one can comfortably absorb a 60% drop in pay.
If you have a pension from an employer that provides you with guaranteed income, the pension and your Social Security checks alone might be sufficient, but you'll want to compare your total projected income against your costs to confirm. If you don't have a pension, though, then you'll need to have enough savings to provide the rest of the support you need.
Making a detailed plan to ensure that you will have sufficient funds is a smart move in this situation. Start with deciding how much you can safely withdraw from your investment accounts without them running dry, add in your Social Security benefit, and see if you have enough money to cover all your costs.
If you don't, you should not claim benefits until you have a plan to guarantee your financial security even when you're no longer getting a paycheck.
2. You don't know your full retirement age
If you are not sure what full retirement age (FRA) is, or don't know when your FRA is, then you also aren't ready to claim Social Security.
Full retirement age is the age when you get to claim your standard benefit for the first time. A claim before full retirement age results in a reduced benefit, while delaying and not claiming benefits after FRA until 70 would result in a benefits increase.
Since the age when you claim benefits relative to FRA matters a great deal in determining the income you'll have coming in, you must know what your full retirement age actually is. It's based on birth year. Here's when your FRA is, based on when you were born:
- 67 if you were born in 1960 or later
- 66 and 10 months if you were born in 1959
- 66 and 8 months if you were born in 1958
Understanding your FRA makes it possible to determine if your choice to claim benefits now is going to reduce or increase the money Social Security provides you.
3. You haven't done a break-even calculation
Finally, you should not claim benefits if you haven't done a break-even calculation. That's a calculation that shows how long you'd have to receive a delayed Social Security benefit in order to break even for missed income.
Let's say your full retirement age is 67, and you are 62 now and trying to decide whether to claim your benefits or not. You'll need to figure out:
- How much higher benefits will be at 67 versus 62
- How much income you'll be giving up between ages 62 and 67
- How long it will take to make up for the missed income as a result of your higher benefit.
If you were on track to receive a $2,000 monthly benefit at 67, then claiming it at 62 instead would reduce your benefits by 30% to $1,400. Your benefits at 67 would have been $600 higher than if you claimed at 62. However, you will have passed up five years of $1,400 monthly checks, which adds up to $84,000. You're getting an extra $600 a month later on, but it will take you 140 months, or 11.67 years, in order for that extra money to add up to the $84,000 you missed out on.
You must do this calculation when deciding what age to claim benefits, as you can then make a more informed choice about whether you are likely to break even or not. In our example, for instance, you'd be better off with the earlier claim if you didn't think you'd live longer than 11.67 years after you started getting Social Security at 67. You can get the numbers for this calculation at the mySocialSecurity.gov site, which helps you estimate benefits at different ages.
By taking care of these three tasks, you can confirm that you're not making a mistake and claiming Social Security before you should. You'll definitely want to do them, so you aren't left with regrets.
