To claim or not to claim -- that is the question that many Americans have about their Social Security benefits. There are pros and cons to claiming those benefits at 62, the earliest age allowed.
For many Americans, waiting until the full retirement age (currently 67 for anyone born in 1960 or later) makes sense. However, there are two ways you can make more money over the long term by claiming Social Security benefits at age 62.
The not-so-pleasant option
Let's start with the not-so-pleasant way of making more money by claiming Social Security benefits early. If you don't expect to live long enough, it won't pay off to delay receiving benefits.
Indeed, the top reason for claiming Social Security at age 62 is to avoid this risk. No one knows how their health will hold up.
How long do you have to live to make waiting until full retirement age to claim Social Security the better alternative? It depends on several factors, including the program's cost-of-living adjustments (COLAs) and how much income you make outside of Social Security.
However, using a break-even age of between 78 and 79 is a good rule of thumb. If you expect to live beyond that point, waiting until age 67 to claim Social Security benefits will usually make more sense. If not, claiming at 62 could generate more cumulative benefits for you.
A more attractive alternative
There is a far more attractive alternative to making more money from claiming Social Security benefits at age 62, though. But it still involves delayed gratification. The idea is to claim Social Security at 62 but not use the benefits for paying your bills. Instead, you would need to invest the money.
Obviously, you'll need another source (or multiple sources) of income to make this work. One possibility is to keep working until your full retirement age or longer. However, there is a drawback with this approach: Social Security will deduct $1 from benefits for every $2 earned above a specified threshold (in 2022, the limit is $19,560).
The other key requirement is that your investments must generate positive returns. If you put all of your Social Security benefits in a highly risky asset that loses money, this approach will fail miserably.
However, there are assets that are quite safe. For example, Treasury bonds often offer rates of return of at least 2%.
Let's suppose that your monthly Social Security benefit would be $1,500 if you wait until age 67. If you claim benefits at age 62, there's a 30% penalty that would reduce the monthly amount to $1,050. A safe return of 2% would push out the breakeven point where waiting to claim Social Security until age 67 pays off beyond age 79. The higher your rate of return, the more attractive claiming Social Security early and investing the money will be.
Which age is best to claim Social Security benefits depends on your willingness to take on risk. Claiming benefits at age 62 will be appealing to many for whom the old adage that "a bird in the hand is better than two in the bush" resonates.
However, many seniors aren't as risk-averse and have other sources of income that would allow them to claim Social Security benefits early and invest the money. For these individuals, another old saying could be more applicable: "The early bird gets the worm."