It’s often discouraged, but for some investors, claiming early makes good financial sense.
Even if you love your job, let’s face it — you’d probably still like to have the option of retiring early. Most of us don’t have that option simply because we don’t (or won’t) have enough money to do so. We need to continue tucking away a portion of our wages for a while longer, or we need to delay Social Security retirement benefit payments so those eventual payments will be bigger, or both.
There’s actually a decent case to be made, however, for beginning your Social Security benefits at the earliest possible age of 62.
Minor reasons to start Social Security as soon as possible
For a long time, Social Security treated 66 as the full retirement age, or FRA. That’s the age at which a beneficiary can receive 100% of their intended benefits. The number has been ratcheted up to 67 for anyone born in or after 1960 to reflect the fact people are generally living longer than they used to.
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
So if starting your Social Security retirement benefits before you’ve reached your FRA is an option, why isn’t everyone signing up as soon as they turn 62?
There’s a financial cost to taking benefits early. Indeed, the further away you are from your full retirement age when you claim, the smaller your monthly payments will be. For example, should you initiate your payments at the earliest possible age of 62, your checks will be on the order of 30% less than they’d be by holding out until you’ve hit your FRA of 67. That difference also doesn’t take into account the possibility of waiting to claim until age 70, at which time delayed retirement credits would boost your monthly payments an additional 24% higher.
Initiating your payments at 62 years of age, however, still isn’t a terrible idea for some people, for a handful of reasons.
One of these reasons is obvious: You just need to. Whether failing health prevents you from working or bills just need to be paid (or a combination of both), postponing dealing with a problem often allows that problem to grow.
Another legitimate reason to claim Social Security as soon as possible is to maximize you and your spouse’s net benefits while also minimizing your risk should one of you pass away earlier than expected. If minor children are in the picture, that’s also a consideration.
The rules regarding spousal benefits are quite tricky, so be sure to discuss your options with a qualified financial professional. You can also discuss the matter directly with a representative of the Social Security Administration, although these employees can’t help you with other end-of-life and estate-planning issues.
Yet another motivating factor for claiming Social Security sooner rather than later is the prospect of Social Security’s pool of funds not being able to cover all of its intended payments in the foreseeable future. Depending on the estimate in question, a retiree’s benefits could be reduced by 20% to 25% sometime in the mid-2030s. Starting your benefits as soon as possible means you’ll be collecting all of whatever benefits you’re due at your age … at least for a few years.
Claiming benefits at 62 doesn’t prevent you from working
Perhaps the most overlooked and underestimated upside of starting your Social Security retirement benefits before you’ve actually reached your full retirement age is that doing so doesn’t prevent you from continuing to work.
There’s one important detail to consider, however, if your plan is to earn a wage while also drawing your benefits. If you’re not yet at your FRA and you earn more than a certain amount, you’ll end up reducing your Social Security payments. For 2023, the Social Security Administration reduces your benefit payments by $1 for every $2 you earn above $21,240.* If you’re an above-average earner, claiming at 62 and then continuing to work could mean you end up reducing most (or even all) of your Social Security retirement benefits payments in any given year.
That’s not necessarily the end of the world though. You may be in a situation where the option to quit working or reduce your hours at any point in time makes it worth the penalty. You can also take comfort in the fact that even though you’re potentially reducing your Social Security benefits now, the Social Security Administration regularly recalculates benefits payments. That means your earnings while collecting benefits can affect future monthly payments. And once you do reach FRA, the program will credit you for any previously withheld benefits.
Now, here’s the kicker: Receiving Social Security retirement benefits doesn’t preclude you from continuing to contribute earned income to an individual retirement account, or IRA, which often reduces your total taxable income anyway.
Although Social Security payments themselves aren’t considered taxable income that can be put into an IRA, wages are. So if you can afford to do so, use your Social Security payments first to cover living expenses while tucking away as much wage-based income as you can in a tax-advantaged retirement account. Also bear in mind there’s nothing preventing you from investing any unneeded Social Security payments outside of an IRA.
The growth of these continued investments may even offset the 30% reduction in your monthly Social Security checks you’d see by claiming at 62 rather than your full retirement age.
Starting to collect Social Security retirement checks early still leaves you with a lot of options, and in turn, this flexibility can allow you to make the most of your time and money.
As always, be smart
While there are upsides to starting your retirement benefits before your FRA, it’s still important to understand the downsides, and their associated costs.
That’s especially true if Social Security is your primary or only source of income in retirement. The average monthly Social Security check this year is only about $1,800, and it’s roughly one-third less than that for people who claimed benefits shortly after they turned 62 years old.
This is not a decision to make lightly, since it’s usually a permanent one once you initiate payments. Though you can change your mind within 12 months of your initial claim, you can only do so once, and you’ll have to pay back any benefits you received in the meantime.
Nevertheless, if you’re willing and able to work beyond the age of 62 and you’re able to fully invest your excess cash flow between then and your FRA, starting your retirement benefits early can make sense. Indeed, if you intend to max out your retirement account contributions in the meantime, the value of this decision may continue to rise year after year.
Just bear in mind that your time and health are still more important than any amount of money. You don’t want to give up too much of one for the other.
