Most retirees end up waiting until what is called their full retirement age (FRA) of 66 or 67, or even later, before claiming Social Security benefits. But you can actually start claiming them as early as the age of 62 if you feel like you are in a position where it makes sense.
When making this choice, you should think long and hard about where you're at in life from a financial perspective, and also understand how your health is doing. The goal is to maximize the value of your Social Security benefits into retirement for as long as possible.
A helpful exercise can be to figure out how much Social Security you would qualify for at certain ages and annual incomes, which will help you decide on whether to take Social Security early or wait for your FRA. Let's take a look at what your Social Security benefits would be if you retired at age 62 and earned the 2022 equivalent of $60,000 in annual income on average over your career.
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How to calculate your benefits
The formula the Social Security Agency (SSA) uses to calculate your benefits can look complex on its face but is easy enough to break down if you take the time to do the work.
The first part of the formula is based on your wages, specifically those of the 35 years in your career in which you made the most earnings. This is called your average indexed monthly earnings (AIME). However, you don't just take a straight average of your salary in those 35 years because your wages in, say, 1987 were worth a lot more back then, than if we took that number now.
To account for inflation, the SSA takes your nominal earnings and indexes them to figure out what that wage in 1987 would equal in the present. For instance, the SSA shows on its website that if you made $17,500 in nominal earnings in 1987, your indexed earnings in 2022 would be $52,832.
You would then take your indexed earnings over your 35 highest years of wages, average those out, and then divide by 12 to get your AIME. If your highest 35 years of wages after indexing average out to $60,000, your AIME would be $5,000.
The penalty for taking Social Security early
After you figure out your AIME, you'll want to figure out what your primary insurance amount (PIA) would be. The PIA is the monthly benefit a retiree would get if they took Social Security at their FRA, which is 67 for those born after 1960 and between 66 and 67 for those born between 1943 and 1960. For those turning 62 in 2022, the PIA calculation involves three steps:
- 90% of the first $1,024 of your AIME.
- 32% of any amount between $1,024 and $6,172.
- 15% of the leftover amount above $6,172.
Now, if you'll recall, in our example the hypothetical person is actually taking Social Security early at the age of 62, and we're also going to assume this person was born after 1960, which means their FRA is 67.
There is a penalty for taking Social Security before your FRA. Essentially, the reduction is based on the number of months between a person's FRA and when they start claiming Social Security.
The maximum number of months, in this case, is 60 because you can only start taking Social Security at 62 and the FRA in this example is 67 (five years x 12 months). Taking Social Security 60 months early results in a 30% haircut to your monthly benefits.
What are your benefits on $60,000 annual income?
We already established above that your AIME is $5,000. Now, we can go in and calculate your PIA if you had waited until 67 to take benefits:
- 90% of $1,024 = $921.60
- 32% of $3,976 ($5,000-$1,024) = $1,272.32
- 15% of 0 = 0
So, with an AIME of $5,000, your PIA comes out to $2,194. But now we have to take the 30% penalty for claiming benefits at the age of 62, which reduces your monthly benefits to $1,536, or $18,432 in annual benefits.
As you can see, claiming Social Security early can significantly reduce your benefits. But for some, it will be a better answer than waiting until FRA.
