We’ve harped on why it can be a bad idea to file for Social Security at 62, the earliest possible age to apply, but for some people it may actually work out for the better.
Before going into why it may make sense to take benefits early, let’s take a quick look at how your benefits are actually calculated.
Essentially, the Social Security Administration (SSA) averages the wages of your 35 highest-paid years in the workforce and adjusts for inflation. Then your average indexed monthly earnings, or AIME, is used to determine how much you’re eligible to collect at full retirement age (FRA).
So claiming early means you will not get your full benefits. This happens because if you file for Social Security before your FRA, then you will be penalized 6.67% for the first 36 months you file ahead of your FRA, and another 5% for every year after those first 36 months. That means losing up to 30% of your benefits, which doesn’t sound great.
But here are three situations where filing early could make sense:
1. If You Can Afford to File Early for Social Security
Having plenty of savings or working while you start receiving your first Social Security benefits checks can be a big boon. It could mean some extra income to travel or start a new business venture. Or it could just be a little extra spending money to enjoy earlier.
2. Social Security Benefits at 62 Make Sense if You Are in Poor Health
The way Social Security works is that you are going to get the same amount of money once your benefits are set using the above equation, but it will just be spread out over a different number of individual payments. So filing early means more payments, but less on each check.
It’s not fun to think about, but if you aren’t expected to live an average life span, you may lose out on some of what Social Security owes you.
Here’s an example, per USA Today:
Imagine you’re entitled to $1,500 a month in benefits at your FRA of 67. Filing at 62 will reduce each payment you get to $1,050, but you’ll collect 60 more payments. You’ll break even in both filing scenarios if you live just past 78 1/2. If you pass away at 72, you’ll come out $36,000 ahead in your lifetime by virtue of having filed early.
3. Social Security can help if you don’t have any other income
You may have to file once you reach 62 and are let go from your job unexpectedly, or if you don’t have any other income coming in.
Finding a new job at an older age can be tough because of age discrimination, so filing early could help pay the bills while you continue to look.
And when you do find that job, you can actually withdraw your application and apply again later if it’s within 12 months of filing. The only downside is you will have to pay back every dollar you received from Social Security if you go this route.
• You can find all of the latest and most important news about Social Security here on Money and Markets.