Taking Social Security Too Early

It’s fair to say that we all have the best intentions when it comes to our savings. Who doesn’t like the idea of having a nice nest egg in place when it’s time to retire? Not me!

We may start off well enough, opening accounts early on in life with visions of a fun and carefree retirement. But then…life happens. Perhaps more than ever before, in 2021 we’ve realized just how quickly reality can find a way to stop meshing with our financial goals.

Extended lifespans and world-rocking situations create a harsh truth that we have to face. We’re all spending a longer time on Earth, but we don’t necessarily have the means to see ourselves through financially. 

True, some things are simply out of our control (the arrival of COVID-19 comes to mind), but there are other steps that we can take to help ourselves financially during times of uncertainty. Not rushing to claim your Social Security benefits is a big one.

It’s so tempting to grab for the cash when things go sideways in life. In many cases, Depression-era economic levels have left many Americans feeling that they have no other choice.

Unfortunately, there are consequences to this decision that are very real and worth evaluating before you take the leap. Here’s what happens when you sign on the dotted collection line.

Consider The Financial Penalties 

There’s no question that Social Security benefits are readily available to Americans prior to their full-benefits retirement age. However, the associated penalties for collecting benefits starting at age 62 can be steep, to say the least.

Having that check in your hand can bring a sense of temporary relief, but taking it early means that your check is bound to be significantly less than you’ll consistently need. In fact, early collectors can expect their checks to be as much as 30% lower than checks taken at the full retirement age.

You’re Missing Out on Money and Lots of It

It never feels great to know you’ve been less than savvy with your savings. When it comes to collecting Social Security benefits early, it can be a particularly hard pill to swallow.

Your full retirement age is calculated based on the year you were born. While benefits are accessible starting at age 62, you actually receive credit for every year that you delay collecting Social Security between 62 and your full retirement age.

Waiting can add up significantly. Individuals who resist the urge to collect on benefits early could earn anywhere from 7% to 8% more on their checks each month when they do cash in—totals that can reach up to $250,000. That’s not chump change. 

The age at which benefits max out is 70. It stands to reason that people who can wait until this time will benefit the most.

It Might Not Carry You Through

There are a lot of unknowns in life, but the one thing we can all count on is the fact that at some point, we have to leave the physical world. No, it’s not the most uplifting subject to consider, but life expectancy plays a major role in the ways that we approach collecting on Social Security.

These days, people are living longer than ever before. This is a good thing overall, but it can make financial planning that much trickier.

People who find themselves needing to take their Social Security benefits early have to plan on stretching out reduced funds over a longer period of time. Between 1956 and 2020, the life expectancy of a 65-year-old woman jumped from 16.9 years to 21.6 years. When paired with an early collection reduction on benefits of nearly 30%, it can be devastating.

The Increasing Wealth Gap

We’ve established the fact that there are financial penalties and consequences in place for collecting Social Security before your full retirement age. We’ve also established that there are bonuses for those who wait until full retirement age and beyond. When these two factors come into play in tandem, they can be problematic.

Most people that collect on their Social Security early do so because they aren’t in a secure enough financial situation to live on their income alone. By taking their benefits early, they not only lock into a reduced amount, but they also put themselves in a position in which they’ll have to continue to live on less throughout their retirement.

People with higher overall incomes are often financially stable enough to wait on collection until their retirement age and may even push the limits further to the age of 70. At this point, they’ll be eligible to collect the maximum amount of benefits, which is then added to their increased personal savings accounts.

Those who make less continue to have less to live on, while wealthier individuals may find it easier to collect more. 

Is There a Better Way?

This is a good and fair question. While the ideal scenario is that everyone would be able to wait until their full retirement age to collect their maximum benefits, it’s not always a realistic situation.

Social Security reforms are frequently suggested as a route to making the payout process a bit fairer across income tiers. Some have suggested reducing the penalty percentage for early collection, while others prioritize capping bonuses when you wait to collect until you’re past the full retirement age.

Until these ideas come to fruition, putting other retirement savings accounts into place is a good idea if you have to cash out on your Social Security benefits early. Options like 401(k) plans and IRAs can be financial cushions that bring peace of mind when it’s time to leave the workforce behind. 

Even if you’re not in a position to add a new savings account to your portfolio, increasing your contribution to an existing account can make a big difference in your ability to thrive in retirement.

It’s never easy to wait, especially when things seem uncertain. However, if you can hold off on accessing those Social Security benefits until your full retirement age, you’ll enjoy the financial coverage that you need and definitely deserve. 

Hope You Enjoyed the Read!