When it comes to Social Security and when you should start receiving it, the answer is clear: “it depends.” Deciding when you should start drawing benefits may involve a bit of probability theory, behavioral economics, and yeah, math.
Although Social Security offers the option to draw benefits as early as age 62, the penalty for doing so before your full retirement age (FRA) can be high. Still, some choose that path anyway. In fact, according to the Social Security Administration (SSA), 47% of current retirees have their retirement base as age 62 to 64, meaning they began drawing before their FRA. Why would they do that? And should you?
What age is full retirement age (FRA)?
If you’ve ever filed your own tax return, you know that government policies and calculations can be complicated. Social Security is no exception. The basic FRA is 65 for those born before 1943 and scales up to age 67 for those born after 1960, as shown in the full retirement age chart on the SSA website. But know that, by some estimates, there are about 2,700 rules, exceptions, and contingencies covering things like spousal and survivor benefits, disabilities, working part-time while drawing benefits, and more.
How does the math work? You don’t need a PhD in quantitative analysis to figure it out, but perhaps a bit of high school algebra would help. Basically, if you retire less than 36 months before your FRA, your benefits will be reduced 5/9 of 1% for each month you begin early. So, if you retire exactly three years (36 months) early, your benefits are reduced by 20% (5/9 x 0.01 x 36 = 0.20). For each additional month you retire early over and above the 36 months, your benefits will be reduced by an additional 5/12 of 1%, or 5% a year.
Don’t want to do the math? Social Security retirement age chart is available on the SSA website. Once there, you can click on any birth year to see how much your monthly benefit will be reduced if you choose to retire early. The retirement age chart also shows the reduction in spousal benefits should you choose early retirement.
Good things come to those who wait. Just as drawing early comes at a price, delaying has its benefits. Pushing off your retirement beyond your FRA can make you eligible for an additional credit of up to 8% a year, up to three years, depending on your birth year. For example, a person born in 1960 would get 100% of her monthly benefit if she retired at age 67. If she waited until age 70, her monthly benefit would be 124%.
Once again, the SSA website can show you the potential benefit should you choose to wait. In fact, the site has 11 different calculators covering benefits, reductions, spouse benefits, life expectancy, and earnings tests.
Social Security retirement age chart example. Would you rather see the data in visual form? For 2023, the average monthly benefit is $1,827. Figure 1 shows how this amount would change depending on whether a person chose to begin earlier, later, or at his or her FRA. Remember, this is an example based on 2023 averages. Your monthly benefit will vary depending on your work history, birth year, and other factors. Plus, each year, the government uses Consumer Price Index data to calculate whether there will be a cost-of-living adjustment, or COLA, added to monthly benefits.
RETIRE EARLY, LATE, OR AT YOUR FRA? This example uses the average benefit amount for 2023. For a person whose full retirement age (FRA) is 67, it shows the cost of waiting and the benefit of waiting. Source: Social Security Administration. Sample data for illustrative purposes only. Each person’s monthly benefit will vary based on birth year, work history, and other factors.
Social Security Benefits: Probability and Behavioral Economics
If the benefits of retiring later are so pronounced, why are nearly half of current Social Security recipients considered “early retirees?” Here are a few considerations:
- Questions about Social Security. Many believe the hype about Social Security’s impending insolvency. Although it’s true that Social Security is strained, and even the SSA acknowledges that unless current rules are tweaked, recipients could start seeing reduced benefits by 2034, the system is not projected to become insolvent. But still, many people believe that once they hit age 62, every month in which they are not collecting Social Security is money lost. While it may be tempting to look at it that way, with longevity gains and medical expenses taken into account, it could be far more valuable to lock in larger Social Security payments later in life than to take a reduced benefit early.
- Life expectancy probabilities. No one likes to face the question, “When do you plan on dying?” But really, it’s part of the equation. Although retiring early likely means a reduction in benefits, there is a breakeven age at which retiring early may make sense. For example, a person who passes away at age 68 would have drawn benefits for six years if he or she began collecting at age 62, but only three years if starting at age 65. But if your spouse is expecting to continue drawing spousal benefits for many years after your passing, it may still make sense to wait. Make sure to evaluate whether the lower-earning spouse should take Social Security earlier while the higher earning spouse delays benefits. For some couples, this presents an opportunity to maximize total benefits.
- Medical considerations. It’s important to note that, if you retire before age 65, you may draw Social Security early, but you may not yet be eligible for Medicare. Make sure you’ve put that into your calculations. For example, if you retire from a job that included medical benefits, and upon retirement you must then pay a monthly Medicare premium, this may significantly reduce your net Social Security benefit. Granted, if you become disabled or are otherwise incapable of working, claiming early may be your best (or only) available option.
Deferring your Social Security benefits can have clear benefits, especially if you plan on a long life after reaching full retirement age. However, it may require fighting against some behavioral biases. It may also require an honest assessment about the number of healthy years you expect in retirement. Your spouse’s potential Social Security benefit should also be part of your decision-making. And then, you need to do the math (or at least check the Social Security retirement age chart). Look at the total amount you (and your spouse, if applicable) could garner from Social Security at various old ages like 85, 90, and even 95 and compare these totals to claiming at age 62, FRA, and 70. Women in particular need to evaluate their Social Security claiming decisions to make sure their longer life spans are covered. Women typically provide care to others, but then wind up needing paid care in old age. Having a higher Social Security benefit at those older ages can help pay for some of the care needed.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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