Should the Average American Take Social Security at 62?

There's a reason 62 is currently the most popular age to file for Social Security: It's the earliest age at which you're allowed to start taking benefits. According to a report by the Center for Retirement Research at Boston College, 42% of men and 48% of women claim their benefits at 62. But while filing for Social Security at 62 makes sense in some scenarios, the average American is still better off waiting on those benefits.

The downside of taking Social Security early

To understand the problem with claiming Social Security early, you'll first need to know a little bit about how benefits work. Your Social Security benefits are based on your 35 highest years of earnings. Once your base benefit amount is established, you'll be eligible to collect it in full once you reach your full retirement age (FRA).

Your FRA is based on your year of birth, as follows:

DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.

If, based on your earnings history, you're eligible for a monthly benefit of $1,500, and you were born in 1960, you'll get to collect that full $1,500 if you file for Social Security at age 67. But if you file for benefits at age 62, you'll face a steep reduction.

IMAGE SOURCE: GETTY IMAGES.

For every year you claim Social Security early, you'll lose 6.67% of your benefits for the first three years, and then 5% a year thereafter. In our example, filing for benefits at 62 instead of 67 would take a $1,500 payment down to just $1,050 a month. Furthermore, the benefit amount you initially collect is what you'll get for the rest of your life. So while you will get more individual payments by filing early, you'll ultimately lose out on lifetime benefits if you live until your mid-80s, which is what the Social Security Administration considers the standard life expectancy for the average 65-year-old today.

Here's how those numbers might specifically play out. Let's assume you live until age 84 and file for Social Security at 62. While you'll collect 264 individual payments, those payments will only be worth $1,050 apiece, and your total payout will be $277,200. Now if you wait until your FRA of 67 to claim Social Security, you'll only get 204 individual payments, but at $1,500 a pop, you'll end up with $306,000 in lifetime benefits -- an almost $29,000 difference.

Unless you have a major health issue or a pressing reasonyou need your money sooner (such as losing a job), filing for Social Security at 62 could mean cheating yourself out of additional income. And given how little the typical American has saved for retirement, that's a major problem.

You need all the Social Security income you can get

Because Social Security was never designed to replace your pre-retirement income in full (at best, it'll cover roughly 40% for the typical worker), you'll need independent savings to ensure that you have enough money in retirement. Most retirees require at least 70% to 80% of their former earnings to stay afloat financially, though some actually wind up needing considerably more.

Unfortunately, the majority of workers aren't saving enough for retirement, and as such, they're bound to rely on their Social Security benefits even more. According to the Economic Policy Institute, the average American family has $95,776 saved for retirement. Now that might seem like a decent chunk of cash, but when you divvy that up over a 20-year retirement (which is actually being conservative, as people are living longer these days), that's roughly $4,800 a year, or $400 a month, of income. Throw in the average monthly Social Security benefit, which is currently $1,360, and you're looking at just $1,760 a month, or $21,120 a year, to cover the bills as a senior.

Here's an even scarier statistic. Though the average retirement savings balance in the country is $95,776, the median savings amount is only $17,000 -- which means more people have less than the average than more. This is precisely why the typical American can't afford to take Social Security at 62 -- because slashing those benefits in the absence of independent savings is basically an instant recipe for disaster.

Now if you're among those folks who have saved well more than that $95,776 average, and you're confident you've amassed enough of a nest egg to sustain yourself financially in retirement, then taking Social Security at 62 may not be such a bad idea. Though you'll lose out on a portion of your benefits, if you don't actually need that money, having it available to spend on leisure can help you enjoy the early years of retirement, when you're likely to be your healthiest.

Similarly, if you don't have much in the way of savings but are desperate for money at 62, you're better off taking Social Security than racking up credit card. But if you're like most people, you'll come out ahead by waiting until your full retirement age (if not longer) to claim Social Security. The typical American worker needs all of the retirement income he or she can get, so it pays to maximize those Social Security benefits and collect as much as possible.