About 64 million Americans rely on Social Security benefits as a major part of their income in retirement. Consider these facts: Approximately 50% of married couples and 70% of unmarried persons receive 50% or more of their income in retirement from Social Security, according to the Social Security Administration.
A good way to maximize your Social Security benefits is to hold off on claiming benefits until age 70. The longer you wait beyond your full retirement age (FRA) — which is the age you qualify for full benefits — the higher your monthly benefits will be, up until 70. After 70, the benefits don’t increase.
If you were born after 1960, your full retirement age is 67; if you were born between 1943 and 1959, it’s 66; and if you were born before then it’s 65. Currently, if you’re in the 1943-1959 cohort and you wait until age 70, your benefits are 32% more.
If you claim benefits before your FRA, your benefits will be reduced. At 65, it’s 93.3% of the FRA amount; at 64 it’s 87.7%; at 63 it’s 80%, and at 62 it’s 75%. But waiting for your FRA, or longer, is not for everyone. There are some good reasons why you should claim benefits as early as possible, which is age 62. Here are a few.
Reason No. 1: Mo money, no problems
If you’ve worked hard and built up a nice nest egg in your 401(k) plan, IRA, or pension — or all of the above — you may have an adequate amount for retirement from these other sources. You may also have a spouse who has done the same.
If this is the case, why not claim your Social Security benefits early and enjoy the extra retirement income? While the amount will be reduced by about one-quarter from your FRA benefit, you’ll be claiming it over a longer period of time — an additional four to eight years earlier. If you are healthy and have a good family medical history, you could actually end up with more in benefits over time.
It’s best to consult with a financial advisor to determine how much you need for a comfortable retirement and if claiming benefits at 62 makes sense.
Reason No. 2: Just what I needed
While it sounds good on paper to wait until your FRA or age 70, it’s not always feasible. You may have been forced into an early retirement by losing your job, or due to a health issue that’s affected you or a family member. A recent survey by Nationwide Financial found that 49% said they retired earlier than expected — with most claiming unexpected job loss, health issues, or caring for an ailing family member.
In these cases, waiting is not an option. The additional income may be essential. It’s important to note that if you are in this situation, you can still work part-time while claiming Social Security benefits, as long as you don’t make more than $18,240. If you make more than that, there will be reductions in benefits.
Reason No. 3: Even better than the real thing
Savvy investors could do well by claiming their benefits at age 62 and then reinvesting that money in the market for even better returns.
If your FRA is 66, and you claim at 62, your benefits are reduced by 25% (compared to a 6.7% reduction if you wait till 65). But the upside is that you’re getting a head start compared to those who start receiving benefits at 66. If you could take that distribution and equal or match the historical returns of the S&P 500 — which has gained about 7% annually since its introduction in 1957 — you’d be ahead of the game. My Foolish colleague Dan Caplinger explains the math here. Plus, you could access that money at any time if it’s invested in stocks or a mutual fund.
Of course, you could also lose that money — you should never invest cash you know you’ll need in the next three to five years. But if the market is strong and you have a solid record of investing, it might be a strategy to consider.
Any decisions you make about what to do with your Social Security benefits should be well thought out and discussed with spouses, partners, family members, and your financial advisor. But you may find that it makes sense on your 62nd birthday to take the money and run.
