There are few hard-and-fast rules when it comes to Social Security. You may have heard some people say that it's not a good idea to sign up for benefits right away at 62 because you'll shrink your checks. While this is true, that doesn't mean it's always the wrong move.
There's one situation where signing up right away could help you bank an extra $20,000.
How does your age affect your Social Security benefits?
The size of your Social Security checks is based on your average monthly earnings over your working years and the age you sign up for benefits.
If you want the full benefit you're entitled to based on your work history, you must wait until your full retirement age (FRA) to sign up. This is 66 for those born between 1943 and 1954. Then, it rises by two months every year thereafter until it reaches 67 for those born in 1960 or later.
You're eligible for benefits beginning at 62, but signing up early has a cost. You claim checks for more years, but each check you receive is smaller. Those who sign up right away at 62 only receive 70% of their full benefit per check if their FRA is 67 or 75% if their FRA is 66.
Every month you delay benefits increases your checks slightly until you reach your maximum benefit at 70. This is 124% of your full benefit per check if your FRA is 67 or 132% if your FRA is 66.
It might seem that delaying benefits is the smarter play, and sometimes it is. But there are times when the opposite is true.
How long will you claim benefits?
Your life expectancy plays a huge role in the best time for you to start Social Security because it determines how many years you receive checks. This in turn affects how much you get from the program over your lifetime.
As a general rule, people who live relatively long lives -- into their mid-80s or beyond -- tend to receive more money from Social Security if they delay benefits while those with shorter life expectancies tend to benefit more from starting earlier.
Say you qualify for the average Social Security benefit of $1,559 at your FRA of 67. You'd get $1,091 per month if you chose to sign up at 62. With a life expectancy of 75, you'd get $149,664 in total if you waited until your FRA to sign up.
However, if you started benefits at 62, you'd have received $170,196 in your lifetime -- about $20,532 more. But the tables turn if you live until 85. Then, waiting until your FRA to start claiming would net you $35,628 more than signing up at 62.
Now it's your turn
Your own situation is unique, but you can apply the same steps used in the example above to figure out when it's best for you to sign up for Social Security.
First, estimate your life expectancy. It's usually a good idea to assume a longer life expectancy unless you have good reason to believe you won't live long.
Next, create a my Social Security account. Here, you'll find personalized estimates of your monthly Social Security benefit at various starting ages based on your actual work history. It'll also show you how changes to your income will affect your benefits. This is useful to those who are a long way off from claiming Social Security.
Choose a few ages you're considering and note your monthly benefit for those ages. Then, multiply each of them by 12 to get your estimated annual benefits. Finally, multiply each of these by the number of years you expect to claim benefits to see which offers you the most money overall. In our example above, we multiplied the average $1,559 benefit by 12 to get an annual benefit of $18,708 and then multiplied this by eight years to get a lifetime benefit of $149,664 for someone who lived to 75.
Once you know which starting age will give you the most money overall, you should try to wait until this age to sign up if you can afford to do so. But this isn't always possible. If financial concerns force you to sign up earlier than you planned, see if you can delay benefits for even a few months. Every month you delay will boost your future checks permanently.
Now that you have a Social Security plan in place, you should have a good idea of how much it will cover for you in retirement. Use this information, along with your estimates of how much your retirement will cost, to figure out how much you need to save on your own. Stick to this plan as much as possible to keep yourself on track for your retirement.
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