There aren’t many absolutes in personal finance or financial planning. But when it comes to Social Security, you can be almost certain you’ll face this decision that requires you to choose:
Should you start taking Social Security benefits at 62 -- or should you delay to 66 or even 70?
Here’s what you need to know to answer this complex question, and to get it right to make sure you maximize your retirement income.
How Waiting (or Not) Impacts the Amount of Your Social Security Benefits
Your “full retirement age” is the magic number when it comes to Social Security income. Right now, the Social Security Administration defines the full retirement age as 67.
But that doesn’t mean you have to wait that long to claim your benefit and start receiving income from Social Security.
In fact, you can file for benefits as early as 62. The catch? You won’t get your full benefit. That doesn’t kick in until full retirement age, so the sooner you claim your benefits, the less you receive monthly.
Whatever you choose, you can find your specific benefit amount by going to SSA.gov and using their calculators to help you estimate the numbers.
Here’s how the benefit amount breaks down each year once you turn 62. If your full retirement age is 67, your Social Security benefit is reduced by:
● About 30 percent if you start collecting at 62.
● About 25 percent if you start collecting at 63.
● About 20 percent if you start collecting at 64.
● About 13.3 percent if you start collecting at 65.
● About 6.7 percent if you start collecting at 66.
Again, once you hit 67 you can get the full benefit you’re entitled to… but if you wait even longer, you get even more than your “full” benefit.
Should You Delay Taking Social Security? Traditional Wisdom Says Yes
For this reason, the common advice around this issue suggests to delay taking Social Security benefits for as long as possible (assuming you can afford to do so, meaning you don’t need this as a source of retirement income).
Every year after 67 that you wait to file, your benefit increases by 8% which provides an obvious incentive for waiting. You max out what you can receive once you hit age 70, however, so there’s no reason not to take your benefits at that point.
When you think about those 8% annual increases over the full benefit, it can seem crazy to consider taking the lowest possible benefit at 62.
But I believe waiting to file for benefits is not always the best thing to do, because nothing is guaranteed in life.
The Case for Not Waiting to Claim Social Security
Yes, it’s true: If you wait, you get a bigger payout… but there’s a breakeven point (in terms of age) that you have to hit to make waiting worth it. And you need to live to that age to receive a larger total amount of dollars from Social Security from waiting and losing out on potential income because you didn’t claim your benefits sooner.
While the average life expectancy might be increasing, there’s no guarantee that you personally will enjoy good physical and mental health to not just make it to 90 or more, but to enjoy the ride along the way. I don’t mean to be depressing, but it’s a reality we need to consider if we want to maximize our money.
Take a look at this quote from an Investopedia Article by Melissa Horton. Horton does a great job explaining this issue:
If we assume the full retirement age for a retiree is 65 and he or she chooses to begin receiving Social Security income at age 62, his or her full retirement age benefit of $1,000 may be reduced by 20%, leaving the retiree with $800 each month. If the retiree's co-worker with the same birth date and similar earnings history elects to receive his or her benefit at full retirement age three years later, the benefit may equal $1,000 each month.
For the first three years, the first retiree received a total of $28,800 (or $9,600 per year) while the second received nothing. Once the second retiree starts receiving benefits, he or she receives $200 more each month, or $2,400 more each year than the first retiree. The Social Security break-even age is 77, or 15 years after the first retiree elected to receive benefits. After this point, the second retiree earns more over his or her lifetime than the first.
In other words, you have to live to at least 77 before the decision to claim your Social Security benefits at 62 starts to become financially questionable. For the 15 years in between, it’s actually a smarter play than the person who waited it out in hopes of getting a bigger benefit.
While conventional wisdom says to wait as long as possible to claim Social Security, it’s worth taking a closer look at the issue in the context of your personal and financial situation before making a decision based on a blanket rule.
Filing for benefits early means you won’t get your “full” amount -- but it also means you’ll start receiving your checks earlier, which may be when you need the funds the most.
To make a final decision on the best Social Security strategy for you, work with an advisor who can help by running projections and testing various scenarios so you can better understand potential outcomes of the choices you make around claiming your benefits.