Impact of Collecting Social Security Before Full Retirement Age

Collecting Social Security benefits before your full retirement age (FRA) can significantly impact your benefits, sometimes resulting in a forfeiture of thousands of dollars over your lifetime. The Social Security Administration's (SSA) online calculator can help you estimate the exact amount you might receive after early collection.

Calculating the Liabilities of Early Collection

The math behind this is relatively straightforward. If you are a U.S. citizen, your FRA is likely 67 years old if you were born in 1960 or later. If you choose to start collecting Social Security benefits before your FRA, each month matters. For the three years before your FRA, you forfeit 5/9 of 1% of your monthly benefit for each early month of collection. For the two additional years before FRA, the penalty increases to 5/12 of 1% for each early month. In total, the maximum forfeiture can reach 30% of your FRA benefit amount.

Investment Considerations vs. Early Collection

Deciding whether to claim Social Security early is a complex task, involving various considerations like investment returns and the risk of dying. The effective penalty for early claiming is actually closer to 6.7% per year. Some argue that the best strategy is to invest the early payments, but the critical question is whether you truly need the money to maintain your lifestyle.

If you find yourself in a situation where you struggle to earn a living, early claiming may be tempting. However, simply reducing the amount you withdraw from savings can achieve the same result. Additionally, if you are considering working, claiming Social Security early can make working less beneficial, as your monthly benefit is withheld while you work.

For those who prefer to continue working, delaying benefits until FRA often makes more sense. If you have the capital and the financial freedom to do so, reaching FRA might provide a more stable income stream and allow for more aggressive investing after that point. Many individuals, including even doctors and accountants, delay claiming benefits to take advantage of these benefits.

Financial Planning at Age 62

By age 62, it's crucial to have a solid financial plan in place. Before considering early collection, you should ensure you have income streams that can cover your cash flow needs for the rest of your life. If you don't need the Social Security benefits to live on, you can claim the benefits early and reinvest them.

Zipping into early collection without an adequate financial plan can be a risky move. Investing the benefits you receive early can often provide a better return than waiting until future years. The important point is that you should only claim Social Security early if you are confident in your ability to manage your financial needs without it.

Conclusion

Whether to claim Social Security benefits before your full retirement age is a decision that involves careful consideration of financial planning, investment potential, and individual circumstances. The SSA's online benefit calculator can be a valuable tool to estimate the impact of early collection. If you are considering early claiming, it is essential to have a thorough understanding of your financial situation and long-term goals.