Social Security is a significant source of income for most retirees and that means that the amount of Social Security income you collect will be a big consideration in deciding when you retire. You can begin collecting Social Security as young as age 62. However, you'll only get 100% of your Social Security benefit if you wait until your full retirement age to start receiving benefits. Read on to find out how much you can expect to receive in Social Security income at age 62.
How Social Security works
Social Security is a retirement safety net that's been around since the Great Depression. Its goal is to provide a minimum level of financial security in retirement and so it's designed to replace about 40% of an average worker's pre-retirement wages.
Unlike traditional employer-sponsored retirement plans such as 401(k)s, Social Security taxes on your current income aren't set aside in an account for your use later. Instead, those payroll taxes are paid out as benefits owed to existing Social Security recipients.
The amount you'll collect when you claim Social Security is based on a formula that adjusts your highest 35 years of income for inflation and then divides that figure by 420, or the number of months in 35 years, to get an average monthly amount. This amount is then adjusted lower by bend points at specific income levels to calculate your primary insurance amount at full retirement age.
Full retirement age is the only age at which you can receive 100% of your Social Security benefit and it varies depending on your birth year. If you were born in 1956 and you're turning 62 this year, then your full retirement age is 66 years and four months.
Taking a haircut
Social Security is set up to pay out the same amount in total lifetime benefits regardless of what age you claim your benefit. This means you'll receive a smaller monthly benefit if you claim when you're younger than full retirement age and a bigger benefit if you claim when you're older than full retirement age.
How much less you receive in benefits by claiming early depends on exactly how many months prior to full retirement age you begin receiving your benefits. Specifically, Social Security will reduce your benefit by 5/9 of 1% for each month you claim before full retirement age, up to 36 months. If the number of months claimed early exceeds 36, then your benefit is further reduced by 5/12 of 1% per month.
For example, if you were born in 1956 and you decide to begin receiving benefits exactly at age 62 this year, then you'll collect 73.3% of the amount you'd collect at full retirement age. Thus, if your full retirement age benefit is $1,000 and you claim at age 62, you'll receive $733 per month in Social Security income.
While everyone's exact Social Security payment is different because everyone has a different earnings history, it may be useful to know that the average Social Security income awarded to people age 62 in December 2017 was $1,112.
Trade-offs to consider
As I mentioned, Social Security rewards people who wait to claim their benefit. Up until age 70, you can receive delayed retirement credits that increase your full retirement age income by a fixed percentage for every month you hold off. Overall, these credits add up to an 8% increase for every year you delay.
It may be tempting to wait and collect a bigger Social Security check, but there are plenty of reasons why you might want to begin your benefits at age 62. For example, if your retirement plans include travel, you might want to claim when you're younger and healthier. Or, if your health is declining, you might want to claim early to make sure you collect at least some of your Social Security benefits during your lifetime. You may also want to claim early because of a job loss or because you have other sources of income in retirement, and you plan on investing Social Security payments to build up a bigger nest egg.
A breakeven analysis may be factoring into your decision, too. In terms of lifetime benefits received, the following chart illustrates that claiming at a full retirement age of 66 wouldn't break even with claiming at age 62 until a person reaches his or her late 70s.
Something else to remember
If you decide to claim at age 62, then you'll need to be aware of Social Security's income limit.
Social Security allows recipients to continue working while collecting Social Security income, but if you earn above a set limit every year, you'll have some of your Social Security benefits held back and paid out later.
In 2018, if you're younger than full retirement age, you can earn up to $17,040 per year without any reduction in Social Security income. However, once your income exceeds that amount, Social Security will hold back $1 for every $2 earned.
This means that if you decide to collect benefits at age 62 this year and continue working, you might not receive all the benefits you expect. Don't worry, though. Any money held back does go back into the formula used to calculate your full retirement age benefit and so this reduction will increase your future Social Security income.