Once you’re old enough to claim Social Security, you’ll have to make a tough decision. The earliest age to sign up for benefits is 62. But if you don’t wait until full retirement age (FRA) to take benefits, they’ll be reduced on a permanent basis.
FRA is 67 if you were born in 1960 or later. If your FRA is 67 but you claim Social Security at 62, you’re looking at reducing your monthly benefits by 30% — for life.
You’d think financial guru Dave Ramsey would be against claiming Social Security at 62. Ramsey is a huge proponent of helping people attain financial security and steer clear of debt. He’s the type of person you’d think would encourage people not to reduce a major income stream.
Instead, Ramsey actually thinks claiming Social Security at 62 makes sense. But here’s why you may not want to do it.
Why Ramsey supports claiming Social Security at 62
Ramsey’s logic on Social Security is easy to understand. As he says, “In most cases, it actually makes more sense to take your retirement benefits sooner instead of waiting later. Why? Because your retirement payments die when you die.”
Ramsey’s logic is that you might as well make the most of Social Security while you can. If you wait until age 67 to take benefits in order to avoid a reduction but end up passing away at 71, you’ll lose out financially compared to having claimed benefits at 62.
Still, there’s a real danger in following Ramsey’s advice. It’s important to understand that claiming Social Security at 62 is a very risky move under certain circumstances.
Why you may not want to listen to Ramsey
If you have a nice amount of savings for retirement and you expect to use your Social Security as extra income, then you may want to do what Ramsey suggests and take benefits at 62. However, if you don’t have much, or any, retirement savings, then claiming Social Security at 62 is a move you might seriously regret.
The Federal Reserve puts median retirement savings among Americans 65 to 74 at just $200,000. That might seem like a lot of money, but it actually isn’t given that it could need to last for 10 years, 20 years, or longer.
In fact, many financial experts recommend a 4% withdrawal rate for retirement savings. If you use that rate, a $200,000 nest egg amounts to $8,000 in annual income.
If that’s your situation, and your only non-Social Security income is $8,000 a year, then you probably can’t afford to reduce your monthly benefits for life by claiming them early. In that scenario, you might need all of the income from Social Security you can get.
Also, Ramsey’s logic in claiming benefits early is that you don’t know how long you’ll live, and that if you pass away at a fairly young age, you could lose out on Social Security by waiting to file beyond age 62. However, the flipside is that you could end up living a lot longer than expected. In that case, reducing your monthly benefits for life could be problematic if your nest egg eventually runs out.
This isn’t to say that claiming Social Security at 62 is never a good idea. Before you follow Ramsey’s advice, though, think about your personal situation. You may also want to consult a financial advisor to see what they recommend based on your savings, income needs, health, and retirement goals.
Top Gaining Stocks
Top Losing Stocks