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If you're starting to think about retirement and wondering when the time may be best to claim Social Security, you're far from alone. Millions of Americans are wrestling with that same question every year. While deciding when to claim Social Security is undeniably a personal decision, there's one big pro and one big con that are associated with claiming Social Security at 62.
What is Social Security?
Before we get into the nitty-gritty of the upside and downside of claiming Social Security at 62, let's begin with a refresher on this important retirement program.
Social Security is a pay-as-you-go system, and that means that unlike employer-sponsored retirement plans, such as 401(k) plans, money that you contribute into the Social Security system via payroll taxes isn't set aside for your use later. Instead, those payroll tax dollars are used to fund Social Security payments to people receiving Social Security today.
To qualify for Social Security, you need to have accumulated 40 retirement credits. Typically, most people will accumulate the necessary number of credits to qualify for Social Security benefits over ten years of employment.
If you are among the majority of Americans who are eligible for Social Security, you should also know that the amount of Social Security income you receive monthly depends on a formula based on your highest 35 years of income. If you work fewer than 35 years, then your income will be based on however many years you did work. If you work more than 35 years, then your lowest income-earning years are replaced by your highest income-earning years in the calculation.
Overall, Social Security is designed to replace about 40% of your pre-retirement income, and while the amount of benefits varies significantly from person to person, it may be helpful to know that in 2016, the average retired worker is receiving a little more than $1,340 per month in Social Security income.
The pros of claiming Social Security at 62
The biggest argument for taking Social Security early is that doing so provides you with the potential to receive benefits over a longer period of time.
In determining when to claim Social Security, many people perform a break-even calculation to see when the benefit of waiting overtakes the benefit of claiming early.
As a reminder, individuals qualify for 100% of their monthly Social Security benefit at their full retirement age. Currently, full retirement age is 66; however, it will increase to as high as 67 over time, depending on the year in which you were born.
Image source: Social Security Administration.
Claim sooner than full retirement age, and your monthly payment is reduced. Claim Social Security later, and it's increased.
By adding up the various amounts you can receive from Social Security over time -- depending on when you begin receiving them -- you discover that waiting for larger payments later doesn't start paying off until you reach your late 70s.
For example, let's say Jim will get $1,000 per month in Social Security benefits at his full retirement age of 66, and only $750 per month if he claims at age 62.
If he claims at 62, he would get $9,000 per year and have pocketed $126,000 in payments at age 75. If he waits until age 66 to claim Social Security so that he can get his $1,000 benefit instead, then the amount he pockets from the program won't exceed the amount he'd collect from claiming at age 62 until he reaches age 78.
Source: Author's calculation.
This "bird in hand" argument for claiming early is particularly compelling when we consider that no one knows when he or she will pass away. Obviously, there are infinite other reasons why someone might want to claim at age 62, including health concerns or retirement goals, but the biggest economic advantage of claiming early is the potential to collect more in total income before you die.
That argument is further strengthened in situations where Social Security recipients can invest their Social Security income and benefit from the time value of money, or the ability for money received today to earn returns in the future. For instance, if Jim claims at age 62, opens an account with $1, and then invests $750 per month in something returning a hypothetical 6% per year, he'd have a portfolio worth $422,966 at age 85.
The cons of claiming Social Security at 62
While taking Social Security early can provide you with necessary income and financial flexibility in retirement, there is a big con associated with the strategy. Claiming early may give you more total payments, but delaying can result in a monthly check that's up to 32% larger than the amount you'd receive if you claimed at age 66 and 76% bigger than the check you'd receive if you claimed at age 62.
Image source: Social Security Administration.
Since waiting until age 70 to claim can provide you with a much larger monthly benefit, delaying can mean tens of thousands of additional dollars in lifetime Social Security income for you -- assuming you live long enough.
For example, if Jim were to delay taking his Social Security until 70, then by the time he's 80, the amount of money he would receive from the program would eclipse the amount of money he would have received by claiming at 62. Given that the Social Security Administration currently estimates the average life expectancy of men and of women as 84.3 and 86.6 years, respectively, it may not be a stretch to think that waiting will pay off.
