Being early has its benefits in life. You get your pick of seats in the movie theater, you can kick off meetings with a clear head, and you develop a reputation for being reliable. But there's one scenario where being the early bird might work against you, and it involves the timing of your Social Security claim.
In a recent survey by Schroder Investment Management, 39% of retired respondents said they'd claimed Social Security at age 62. This is the earliest age possible to claim and historically one of the most popular claiming ages. Beneficiaries, it seems, are eager to get their Social Security income stream started.
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You may feel the same way. You've worked for decades, paid into the system, and now the idea of retiring sounds pretty darn good. But before you head down to your local Social Security office, make sure you know the pros and cons of claiming your benefits at the earliest allowable age of 62.
You get a lower monthly benefit
You can claim Social Security as early as 62 and as late as 70. The earlier you claim, the lower your monthly benefit will be. And this makes sense: Claiming at age 62 instead of 65, for example, extends your Social Security payments by three years. To keep your lifetime benefit the same, the monthly amount is reduced by up to 30%. You're essentially trading a shorter stream of higher monthly payments for a longer stream of lower monthly payments.
You can see how the timing of your claim impacts your monthly benefit by creating an account at My Social Security. Once you log in, you can view your benefit at age 62, at Full Retirement Age (FRA), and at age 70. Your FRA is the age you qualify for your full benefit and can be 66, 67, or somewhere in between, depending on the year you were born.
There's one more way an early claim could reduce your monthly payment. Your Social Security benefit is based on the average of your highest-paid 35 years of working. If your income at age 62 is near its peak, you could raise your average -- and your benefit -- by continuing to work another year or two. Walk away from your job and you may also be walking away from a slightly higher Social Security check.
You're subject to an income restriction
When you claim Social Security before your FRA, you are subject to income limitations. The income cap, which changes from year to year, is $18,240 in 2020. If you earn more than that, your benefit is reduced by $1 for every $2 earned above the limit.
To make things more confusing, there's a different limit that applies only in the year you actually reach FRA. And only income earned prior to your birthday month counts. That limit is $48,600 in 2020. For every $1 above that cap, your benefit is reduced by $3.
If you plan on working while receiving Social Security benefits, manage your income wisely, since a benefit reduction doesn't really make sense. You'd be better off delaying your claim entirely. Note that if your earnings impact your benefits, it's not a permanent reduction. Once you reach FRA, the income limit goes away and the Social Security Administration (SSA) recalculates your benefit.
Your spouse becomes eligible for spousal benefits
Once you start receiving benefits, at any age, your spouse who's at least 62 can claim spousal benefits. The spousal benefit is 50% of your benefit at FRA. As with your benefit, the spousal benefit gets reduced when it's claimed early.
Spouses born before 1954 can elect to receive spousal benefits first and later claim their own earned benefit. That's not an option for anyone born after January 1, 1954. If someone qualifies for a spousal and an earned benefit, the SSA pays the higher of the two.
Social Security timing: do what works
There are situations when it absolutely makes sense to claim Social Security as early as possible. Perhaps you've lost your job or health concerns are keeping you out of the workforce. Or you are the ultimate early bird who has ample retirement savings. In that case, you may prioritize early retirement over a higher Social Security benefit.
