3 Reasons to Elect Social Security Early
Social Security is a complex topic that can be overwhelming for many people. When it comes to deciding when to take Social Security, there is a common misconception that waiting is always the best option. While this may be true for some people, there are actually several reasons why you might want to take Social Security early. In this blog post, we will go over three considerations that might lead you to taking Social Security early.
How long do you plan to be here?
The first reason to consider taking Social Security early is longevity. If you are healthy and anticipate living for a long time, it may make sense to wait to receive a larger check. However, you should also consider how long it takes to recover financially if you decide to wait. For example, if you were born in 1960 and took the Social Security check at age 62 instead of waiting until full retirement age, you would receive a 30% pay cut. To break even, you would need to live until age 78. If you started Social Security early, even though the checks are smaller, you would start receiving income earlier. When you are 62, 78 seems like quite a long time. While locking in a lower benefit is less than ideal, having use of money from the system sooner than later may be the right choice. Especially if longevity does not appear to be on your side.
Whose money are you spending?
The second reason to consider taking Social Security early is that if you need to create income, and your options are either Social Security, or drawing from your portfolio - then you need to consider whose money you are actually spending. If you've decided to retire and are not taking Social Security early, you may be spending down an asset that you could pass on. When you pass away, the Social Security check has no death benefit. If you want to leave money to your heirs or a charity, it may make sense to take Social Security early to preserve your assets.
Think of it this way - does it make sense to spend your own money to avoid spending the governments money? If money needs to come from somewhere, it might make sense to tap Social Security early in order to preserve your own assets.
Show me the money!
The third reason to consider taking Social Security early is if you simply need the money. If you physically can't work anymore and you don't have enough income to cover your expenses, it's time to elect the Social Security benefit. Even though taking Social Security early may not be ideal, it is a benefit that you have paid into for years, and if your other options are limited, it may be time to cash in that benefit. The system exists for a reason and even if it is not the ideal scenario to draw early, if you have no other options than you should probably turn on your benefit early.
Something to watch out for!
It's important to note that there are some downsides to taking Social Security early. If you take it before your full retirement age, your benefit will be permanently reduced. For every year that you wait beyond age 62 your benefit grows by approximately 8%, and that growth sticks with the benefit, meaning you've locked in a higher benefit for life. So it's expensive to elect it early, unless you've got a good reason (or three) to do so.
It's also worth noting that if you intend to still work, and you elect Social Security before your Full Retirement Age (FRA in Social Security terms) the amount of money you can earn is limited by the system before they will penalize your check. In 2023 if you elect your benefit before FRA, and you work, you can't earn more that $21,240. If you do - for every 2 dollars above that amount, they will penalize your check $1. That's an expensive penalty though and can really reduce the impact of having a social security check at all.
Once you reach full retirement age you can earn as much money as you want, the Social Security will no longer be subject to penalty. It may be taxable above a certain level of income, but you won't have to worry about them reducing your check.
In conclusion, there are many factors to consider when deciding when to take Social Security. While waiting may be the best choice for some, taking it early may be the best option for others. By understanding your financial situation and your goals for retirement, you can make an informed decision about when to take your Social Security benefits.