The majority of eligible filers do in fact file for social security benefits prior to "full retirement age" (FRA), which is age 66 for most filers. Approximately 40% of filers take their benefits at age 62 and 75% take their benefits prior to full retirement age. Frankly, the majority of early fillers do so because they have little choice; they need the money. However, a large percentage, who would otherwise have the option to delay the start of benefits, do so having given little thought to the opportunity costs of filing early. In fact, many early filers later regret their decision once they learn of the financial repercussions of filing early.
By filing early, you permanently reduce your benefit amount by 25% as compared to your eligible benefit amount at age 66. Furthermore, you also miss an opportunity to increase your benefit amount by 8% per year by further delaying the start of your benefits from FRA to age 70. These represent permanent lifetime increases in your benefits. Delaying the start of benefits can also increase the size of all future cost of living adjustments (COLA) since these COLA adjustments will apply to your now higher benefit amount.
It is true that delaying the start of your benefits means that it will take some time in order to "recoup" the benefits that you could have obtained by filing earlier. From my experience, however, most break-even points range from age 78-81. So, if you think you are likely to live beyond that age range then you may be better off deferring the start of your benefits.
From a financial planning perspective, it is often more important to treat social security benefits as "insurance" versus an "investment". In other words, since social security is a pension (it will pay you as long as you live), it is an invaluable retirement asset that can protect you from "longevity risk"; the risk of outliving your money. Given that social security provides for COLA, it is a powerful tool in addressing potentially higher cost of living expenses later in retirement such as health care costs and long-term care expenses.
Another disadvantage to filing for benefits prior to FRA results from the "earnings test ". If you file for social security prior to FRA and you are still working, if you earn over $15,720 per year, social security will claw back $1 of benefits for every $2 in earnings above $15,720. In the year you turn 66, social security will allow you to earn $41,880 but will claw back $1 of benefits for every $3 you earn above that amount. Any benefits that are clawed back will be included in the recalculation of your benefit amount at FRA. The point being that filing early when you are still working may result in some or all of your benefits being clawed back.
Another disadvantage to filing early is that, by doing so, you are also reducing the survivor benefit for your spouse. If your own benefit is higher than your spouse's benefit then, assuming you pre-decrease your spouse, she will be eligible to switch from her lower benefit to your higher benefit amount at your death. Conversely, if your spouse pre-deceases you, then you would simply continue to receive your own higher benefit. By filing early you may be significantly reducing this survivor benefit.
When deciding whether to start benefits early or not, numerous other factors should be considered including your life expectancy, health status, other retirement assets, how low you plan to work, your spouses benefit amount (if any), divorced spouse benefits (if any), survivor benefits (if any), etc.
In addition to those factors, you now also have to consider the impact of the "new social rules" and "upcoming deadlines" resulting from the recent Bipartisan Budget Bill. In navigating your way through this complex decision making process it would be prudent to engage the assistance of a financial advisor who specializes in social security and retirement income planning. You may have an opportunity to obtain tens of thousands of dollars (even hundreds of thousands of dollars) of additional lifetime benefits from social security. Do your homework and make sure you are not unnecessarily leaving money on the table by filing for social security benefits too early.
Ash Ahluwalia, NSSA, CCSCA, MBA