One of the hardest financial decisions you might have to make is figuring out when to claim Social Security. The earliest age you can sign up for benefits is 62. However, you do not get to collect your complete monthly benefit without a reduction until you reach full retirement age (FRA), which is 67 for anyone born in the year 1960 or later.
If your FRA is 67 and you claim Social Security at 62, you’re looking at reducing your monthly benefits by about 30%. And that reduction is a permanent one. For this reason, seniors are often warned not to sign up for Social Security at 62 if they can help it.
Financial guru Dave Ramsey has been known to give advice on Social Security. And surprisingly, his advice is a bit different.
Ramsey thinks it’s perfectly okay to claim Social Security at 62 if you’re going to take your benefits and invest them. He says that doing so could mean getting a higher return on the money than waiting until FRA to sign up. But while his advice may be appropriate for some people, others should proceed with caution, especially in light of a recent update on Social Security’s finances.
The latest on Social Security’s financial outlook
Each year, Social Security’s Trustees release a report with updates on the program’s financial situation. This year’s report did not contain such great news.
The Social Security Trustees said that based on current projections, the program’s Old-Age and Survivors Insurance trust fund is expected to run out of money in 2033. At that point, only 77% of Social Security benefits would be payable.
The program’s Disability Insurance trust fund is expected to last until at least 2099. But the two trust funds, if combined, could run out of money by 2034, at which point Social Security would only be able to pay 81% of scheduled benefits.
It is, of course, worth noting that these time frames are subject to change. However, it’s becoming pretty clear that Social Security is at a huge risk of having to cut benefits in the not-so-distant future.
Why seniors may want to reconsider Ramsey’s advice
It’s in lawmakers’ best interest to prevent Social Security cuts to the greatest extent possible. Many retirees today get all or most of their income from Social Security. If benefits were to be cut drastically, it could push millions of older Americans into poverty, thereby straining other government programs and resources.
For this reason, lawmakers are likely to take steps to improve Social Security’s financial situation. And one option that’s been discussed in this context is raising FRA from 67 to 69.
If that happens, and 62 remains the earliest age to sign up for Social Security, filing at that age could mean reducing your monthly benefits by an even greater margin than 30%. And a hit like that could be detrimental to your retirement finances.
It also means that Ramsey’s advice may not stand up. Ramsey thinks that with the right investments, it’s possible to come out ahead by claiming Social Security at 62. However, that’s based on current rules for FRA. If those change, it changes Ramsey’s numbers.
All told, the decision to claim Social Security is an important one. Filing early may be right for some people, but it’s also risky.
If you’re thinking of claiming Social Security at 62, proceed with caution. You may also want to consult with a financial advisor to see what they recommend based on your personal situation and income needs.
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