The Social Security Decision Millions Make When They Turn 65 - And Why It Often Costs Them

No matter how well you've prepared for retirement, it's important to file for Social Security at the right time. After all, your savings could run out on you eventually, especially if the stock market crashes several times early on in retirement and you're forced to keep locking in portfolio losses.

But Social Security is guaranteed to pay you a monthly benefit for the rest of your life. So filing for benefits at the right time is crucial.

You might assume that it pays to sign up for Social Security at age 65 since that's when Medicare eligibility begins, but filing for benefits then could have serious consequences.

Your Social Security filing age matters

The monthly Social Security benefit you're entitled to in retirement is calculated based on your 35 most profitable years in the workforce. But your filing age also plays a big role in determining how much of a benefit Social Security pays you.

You can sign up for Social Security at any time once you turn 62. But if you don't wait until full retirement age (FRA) arrives to file, your monthly benefits are going to face a permanent reduction.

FRA is 67 for people born in 1960 or later. You can also boost your monthly checks by delaying your Social Security claim past FRA.

Claiming benefits while signing up for Medicare is convenient

Age 65 is a big milestone for many older Americans because it's when Medicare eligibility begins. You could actually enroll in Medicare a few months ahead of your 65th birthday to put that coverage in place.

You may be inclined to sign up for Social Security benefits at the same time as Medicare. And you can easily do both at the same time if you wish.

In fact, even though Social Security and Medicare are two different programs, you could apply for both through SSA.gov. And there's a key advantage to doing so.

If you're getting Social Security benefits, you'll have your Part B premiums for Medicare deducted from your monthly checks automatically. That saves you the hassle of having to arrange for payment yourself.

Of course, there are other ways to pay your Medicare premiums if you're not getting Social Security. You could set up recurring payments online, make one-time payments, or arrange to have your premiums paid to Medicare out of your checking account. You could also send checks in the mail. But you may find that having your premiums deducted from your Social Security benefits directly is the easiest option.

Filing for Social Security at 65 could have consequences

Despite the convenience of being able to pay for Medicare out of Social Security, signing up for benefits at 65 could have major financial consequences. As mentioned above, people born in 1960 or later have an FRA of 67. If you file for Social Security early, your benefits will be reduced by 5/9 of 1% per month you claim ahead of FRA, up to the first 36 months.

If we do the math, that means you lose about 6.67% of your benefits for each year you claim Social Security before reaching FRA up to the first three years. So if you're filing at 65 with an FRA of 67, you're looking at a permanent reduction of about 13.33%. For a $2,000 monthly benefit at FRA, filing at 65 means reducing your checks to about $1,733 instead.

Make sure to run the numbers

If you have income outside of Social Security and you're not so reliant on your benefits to cover your retirement expenses, then filing two years ahead of FRA may not hurt you so much financially. But if you expect Social Security to be a key source of retirement income for you, then it's important to understand how claiming benefits in conjunction with your Medicare enrollment might affect your finances on a long-term basis.

A 13.33% reduction may seem manageable. But remember, Social Security is guaranteed to pay you for life, whereas your IRA isn't. So if you reduce your benefits and live longer than expected, smaller checks could end up being a problem.

Plus, the smaller your benefits are to begin with, the less the program's cost-of-living adjustments (COLAs) will be worth to you. While your COLA percentage won't change based on your benefit amount, the actual amount of money each COLA leads to hinges on how much you're getting from Social Security to start out with.

Bottom line

Filing for Social Security early is one of the biggest financial mistakes some retirees make. Although filing for benefits at 65 won't result in the same reduction you'd be facing at 62, you'll shrink your monthly checks nonetheless.

If you have a reason to claim Social Security benefits at 65, then it could make sense to do so despite the reduction. But not wanting to deal with paying Medicare premiums may not be such a great reason to accept smaller benefits, especially since there are many easy options for paying those premiums until Social Security starts.