Deciding when to claim Social Security benefits is a highly personal decision that depends on many factors. As a financial planner, I often advise clients to wait until at least full retirement age, if not later, based on the math. But life is not a simple math equation. Here, we'll explore seven reasons why you might consider claiming Social Security as early as possible at age 62.
Full Retirement Age (FRA): The age at which you can claim full Social Security benefits varies depending on your birth year. For most people, this age is between 66 and 67.
Early Claiming: You can start receiving benefits as early as age 62, but doing so will result in a permanent reduction in your monthly payments. Specifically, benefits can be reduced by as much as 30% if claimed at 62.
Delayed Retirement Credits: If you delay claiming benefits past your FRA, you can earn delayed retirement credits, increasing your monthly benefit by about 8% per year until age 70.
Why Timing Matters for Social Security
Social Security is a cornerstone of retirement income for many Americans, but the timing of when you start receiving benefits can significantly impact your financial well-being. Here are some important points to consider:
Life Expectancy: The average life expectancy in the US as of 2022 is 77.5 years. Understanding this can help determine when it might make sense to take Social Security benefits.
Benefit Calculation: Using a calculator on the SSA website, we can illustrate the impact of claiming early versus later. For example these are the monthly benefit estimates for someone age 60 today, earning $75,000 per year:
At age 62: $1,456 per month
At full retirement age (67): $2,210 per month
At age 70: $2,838 per month
Understanding these numbers helps to calculate the break-even age, the age at which you'll receive more cumulative benefits by waiting to claim. For example:
Age 62 vs. 67: Break-even at 76 years and 10 months
Age 62 vs. 70: Break-even at 78 years and 8 months
Age 67 vs. 70: Break-even at 80 years and 7 months
Factors Beyond Life Expectancy
When deciding when to claim Social Security, consider more than just life expectancy. Here are two main factors:
Other Benefits Tied to Your Claim:
Spousal Benefits: Filing early unlocks spousal benefits, allowing your spouse to claim 100% of their benefit or 50% of yours. However, they cannot claim 50% of your benefit until you file.
Your Unique Situation:
This includes factors like your other retirement savings, your health, and how much you need to live on in retirement. These factors are highly personalized and can influence the optimal time for you to claim Social Security.
Seven Reasons to Claim Social Security Early
Health Concerns:
If you have a shorter-than-average life expectancy or health issues that could shorten your life, claiming early might maximize your cumulative benefits. In such cases, receiving benefits sooner can help you make the most of your Social Security.
Reduce Dependency on Portfolio Withdrawals:
Claiming Social Security early can reduce your dependency on portfolio withdrawals, which is crucial in avoiding sequence of returns risk. This risk involves a significant market drop early in retirement, forcing you to withdraw funds from a declining portfolio. By claiming Social Security at 62, you might withdraw less from your investments, helping preserve your portfolio's longevity.
Unlock Spousal Benefits:
Filing for Social Security at 62 allows your spouse to access spousal benefits. Your spouse can then choose to receive 100% of their own benefit or 50% of your benefit. This can be particularly beneficial if your spouse has a lower earnings history.
Tax Considerations:
Social Security benefits are taxed based on your provisional income, which includes your adjusted gross income (AGI), half of your Social Security benefit, and any non-taxable interest. If you expect your provisional income to be higher later in retirement, claiming early might reduce the overall taxes you pay on Social Security. Reasons for higher provisional income later might include deferred compensation plans, pensions, or increased business income.
Lower Lifetime Earnings:
If you have lower-than-average lifetime earnings, the marginal benefit of delaying Social Security might not be worth it. For example, if your benefit is $700 at age 62 but only $850 at age 67, waiting five years for a relatively small increase might not make financial sense.
Covering Bills:
Many retirees plan to live modestly in retirement. If your reduced benefits at 62 cover your essential bills, claiming early might be the right choice. This approach ensures you have a steady income stream from Social Security without the need for additional withdrawals from other retirement accounts.
Immediate Financial Need:
Sometimes, you simply need the money. If retiring at 62 means you need Social Security benefits to cover living expenses, claiming early is a practical choice. This could be due to job loss, inability to work, or insufficient retirement savings.
Conclusion
Deciding when to claim Social Security is a complex decision that depends on many personal factors, including health, financial needs, and other retirement savings. Ideally, you’ll want to evaluate your unique situation and consider both the mathematical and practical implications of your decision.
At Spark Wealth Advisors, we help clients retire with confidence and clarity. If you're interested in learning more, check out our case study video where we explore the decision-making process for claiming Social Security.
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About the author
Christopher Johns
Chris is an experienced financial professional who is passionate about helping people. He enjoys the human side of finance and understanding each person’s unique relationship with money. Chris is a Jacksonville, FL native, growing up in the tight-knit beaches community of Jacksonville. He loves photography & videography, travel, and constantly learning.
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