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 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. According to the Social Security Administration (SSA), 47% of current retirees began drawing benefits before their full retirement age. Why would they do that? And should you?
First, the math ... and the exceptions
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 depends on your birth year. For anyone born in 1960 or later, full retirement age is 67. For those born in 1955 through to the end of 1959 (technically, January 1, 19601), full retirement age ranges between 66 and 2 months and 66 and 10 months. If you were born before 1955, you've already reached age 66 and full retirement age. For more specifics on FRA, refer to the full retirement age chart on the SSA website. When assessing your own FRA, know that, by some estimates, there are about 2,700 rules, exceptions, and contingencies covering spousal and survivor benefits, disabilities, working part-time while drawing benefits, and more.
How does the math work? You don't need a doctorate 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 by 5/9 of 1% for each month you begin early. 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% per year.
Don't want to do the math? A Social Security retirement age calculator is available on the SSA.gov website. Once there, you can select 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 benefits early comes at a price, delaying your Social Security check has its benefits. Pushing your retirement beyond your FRA can make you eligible for an additional credit of up to 8% per 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 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 2022, the average monthly Social Security benefit is $1,658. The chart below shows how this amount would change depending on whether a person chose to begin drawing benefits earlier, later, or at their FRA. Remember: This is an example based on 2022 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 (CPI) data to calculate whether there will be a cost-of-living adjustment, or COLA, added to monthly benefits.
Benefits of waiting to collect Social Security monthly payments
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.
Collecting at age 62 gives you 70% of your full monthly benefit, which is $1,161 in this example, at your full retirement age of 67 you get 100%, which is $1,658, and at age 70 ½, your payments are 124% of your full benefit amount, or $2,056 in this case.
But remember, your benefits ultimately are based on your work and earnings history. Your annual Social Security statement will list your projected benefits between age 62 to 70, assuming you continue to work and earn about the same amount through those ages. If you need a copy of your annual statement, you can request one or view it online on the SSA portal.
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?" There are several reasons.
Doubts about Social Security: Many early benefit recipients are motivated by the hype about Social Security's impending insolvency. Although it's true that Social Security is strained, and even the SSA acknowledges that unless the rules are tweaked, recipients could start seeing reduced benefits by 2034, the system is not projected to become insolvent. Still, many people believe that once they hit age 62, every month in which they're not collecting Social Security is money lost.
While it may be tempting to look at it that way, when longevity gains and likely medical expenses are considered, 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 break-even 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.
However, 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 their 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, so be sure to put that into your calculations. For example, if you retire from a job that included medical benefits and upon retirement you must pay a monthly 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.
Also note that if you decide to wait past age 65, you may still need to sign up for Medicare. In some circumstances your Medicare coverage may be delayed and cost more if you don't sign up at age 65. If you start taking Social Security benefits early, you'll automatically be enrolled into Medicare Parts A and B when you turn 65.
The bottom line on when to take Social Security
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.
1If your birthday is on the 1st of the month, the SSA determines your benefit and full retirement age as if your birthday were in the previous month (December of the year before if your birthday is on January 1).
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.0123-2VHW