Social Security • May 21st, 2020

Maximizing your lifetime Social Security benefits: why claiming at 62 isn't always the best bet

Brian Borchert, J.D., MBA, CFP®, CLU®

Key Takeaways
  • Social Security retirement benefits can be taken anytime between ages 62 and 70 based on your individual circumstances.
  • You’ll need to assess your plans for retirement, your other associated retirement accounts, your health status, and family history to make the right choice for you.
  • Once you’ve filed for your benefits, there is limited opportunity to make any changes.

If you’ve ever listened to any of the notable personal finance experts, you’ll begin to notice a trend that each one seems to have their own take on when you should claim your Social Security retirement benefits. Unfortunately, there is no one-size-fits-all approach when it comes to Social Security elections. When considering the right time to take your benefits, it is always a good idea to understand the decision in the context of your overall retirement plan.

Are you planning to work past 62 because you enjoy your job? Or because you want to continue to grow your nest egg? Then it is to your advantage to delay claiming benefits because if you start early then your benefits will be permanently reduced.

As the Social Security Administration (SSA) notes, you can get your Social Security retirement benefits as early as age 62. The catch is that your income will be reduced by a fixed percentage for every month you claim prior to your Full Retirement Age (FRA). FRA is based on life expectancy actuarial projections depending on the year you were born. Claiming early can put a serious dent into your lifetime benefits.

Filing strategy

First consideration - do you need the Social Security income now?

If you need the income now, the tough decision would be to delay retirement and continue to earn income that you can hopefully save while also allowing your Social Security benefits to grow. For most people, income levels are at their highest in their fifties and sixties. Some people have the option to delay benefits while others do not. If you’re steadfast in the decision to retire early and don’t have a sizable nest egg saved, then Social Security might be a liferaft in choppy waters. It’s important to keep in mind that your benefit will be permanently reduced and that you’ll need to assess your household budget to make sure that you can live within your means.

Tip: Even if you don't have a significant nest egg saved for retirement, any amount of savings may be useful in helping you make ends meet while you delay taking Social Security benefits. Consider this strategy when deciding whether or not take your benefits.

Delaying benefits offers advantages

If possible, delaying benefits is still the recommended path. Taking benefits early (before full retirement age of 66 or 67) can leave you with a permanently reduced benefit.

It is only at the full retirement age of 66 or 67 that you will receive 100% of the benefit that you have earned. Further, for each year that you delay your benefit beyond your full retirement age, your benefit grows by 8% until you reach age 70. Consider the allure of allowing your benefit to grow for a year past FRA and giving yourself an 8% raise when you do claim your benefits. This can mean serious money. For a retiree with a FRA of 67, deferral of benefits to age 70 amounts to lifetime benefits of 124% of their FRA benefit as we’ll demonstrate in the real world example later in the article.

Electing an early benefit could also affect the benefit your spouse or legal partner receives. If you are the higher income earner in the relationship, your spouse may someday rely on a spousal benefit based on your work record. Therefore, not only would your benefits be reduced during your lifetime but your spouse would also receive a reduced benefit for the remainder of his or her life after your passing.

As an alternative, the lower-income earning spouse may choose to access their benefit based on their own work record. This could be a way to bring in some income without affecting the benefit of the higher-income earner.

Assess your health situation and family history

Delaying your Social Security benefits makes more sense if you’re going to live a long time to enjoy those benefits. While we don’t have a crystal ball to predict our futures, we can look at our current health status along with our family history to make an educated decision. Modern medicine offers more rigorous preventative care and effective prescription drugs. Further, our understanding of nutrition and adopting healthy lifestyle habits has never been better. You’re likely to live longer than you would have initially expected. For retirees that are in good health, it’s easier to make the decision to defer Social Security to allow the benefit to grow. Likewise, if your parents and grandparents have a history of longevity into their 90s or 100s then it’s a good indicator that you too could live to that age and should take that into account when making Social Security benefit decisions.

Plan for a better future

Are you still deciding your Social Security claiming strategy?

Real World Dollars and Cents

Let’s take a look at a real life example of a retiree considering their Social Security benefit options and what it could mean to their overall retirement picture. Jane, born in 1960, has a Full Retirement Age of 67 with a Social Security Retirement prospective benefit of $1500/month at that time based on her work history.

If Jane decides to retire in 2022 and take her Social Security benefit at age 62, that benefit is reduced by 30% to $1050/month for the rest of her life. In contrast, if Jane continues to work or retires but holds off on claiming her Social Security benefits until age 70, she would receive a 24% increase on her Full Retirement Age benefit which amounts to $1,860/month. Leaving out the annual inflation or Cost-of-Living-Adjustment (COLA) increases to the benefits for simplicity, Jane would collect more total Social Security income if she waited until age 70 over age 62 by living to age 80 (or as some experts call it “the breakeven point”). For every year that Jane lives past age 80 after claiming her benefit at age 70, she’s further surpassing the extra eight years of income she would have collected had she claimed benefits at 62. According to the most recent CDC actuarial data, a woman of Jane’s age regardless of race could expect to live to a little over age 82.

If Jane passed away at 82 after claiming Social Security at age 62, she would have collected $252,000 in benefits. If she passes away at 82 after delaying Social Security and claiming at age 70, she would have collected $312,480, a $60,480 difference!

Bottom line

Navigating retirement is difficult and figuring out how the puzzle piece of claiming Social Security benefits fits in can make a huge difference to the success or failure of an overall financial plan. For most retirees, waiting to claim Social Security benefits in tandem with electing Medicare coverage is a sensible solution. You should consult a Certified Financial Planner® to help you weigh all of your available options and work with you to make the decision that is best for you.

Author

Brian Borchert, J.D., MBA, CFP®, CLU®

Brian Borchert is an independent consulting professional with a transferable financial planning, business planning, and legal practice background. He has led high performing teams in both the traditional financial services space as well as product development and rollout in a FinTech start-up environment. He is a passionate lifelong learner that enjoys solving problems with a resourceful data-driven approach.