When should you claim Social Security benefits? That's tough to answer, especially since 91% of older adults don't understand the factors that determine how much their Social Security benefits will be.
You can claim Social Security benefits any time starting at age 62, but your standard benefit amount is based on retiring at full retirement age (FRA) -- which is 67 if you were born in 1960 or later. For each month before FRA that you claim benefits, benefits will be reduced, while benefits will increase for each month you delay after FRA, up until age 70.
Because Social Security provides guaranteed income for life, many financial experts advise you wait as long as possible to claim your benefits. But there's also an argument to be made that smart people claim benefits at 62 instead of putting off their claim. Here are four reasons why it makes sense to claim Social Security as soon as possible.
Image source: Getty Images.
1. Claiming early makes early retirement possible
Claiming Social Security when you're 62 could make early retirement affordable when it wouldn't otherwise be.
If you're miserable at work -- or can't work anymore due to health issues or an inability to find a job -- claiming Social Security so you can leave the workforce could save your sanity or your life.
Even if you don't hate your job, studies have shown a link between early retirement and improved health outcomes.
One Dutch study found men who had taken early retirement were around 2.6% less likely to die during the next five years compared with men who stayed in the workforce, while other research found extra years of retirement reduced the risk of serious conditions, such as heart disease, by as much as 20%. That research noted the "retirement effect on health is beneficial and significant."
Smart people who want to reap these benefits of early retirement will claim Social Security at 62, if that's what it takes to make leaving the workforce possible.
2. Claiming early makes retirement more enjoyable
Early retirement tends to be the most enjoyable part of retirement for most seniors because they're still young and healthy enough to do activities they enjoy. Because these activities -- like travel -- require money, smart people claim benefits at 62 so they'll be able to do the activities they want while they still can.
More than one-third of current retirees responding to a Nationwide retirement survey said health problems were stopping them from having the retirement they had hoped for. Among recent retirees responding to that same survey, 80% indicated their health issues occurred earlier than planned.
While a small number of retirees -- around 23% -- said they wished they had waited to claim Social Security so they would have more money to handle health issues, claiming benefits before you're sick means you'll have more cash to enjoy life while you still can.
Ideally, you should make a plan to cover healthcare later in your retirement years -- such as investing in a health savings account -- and use your Social Security income starting at 62 to indulge your passions before it's too late.
3. If you wait, you may not live long enough to break even
One of the best arguments for delaying Social Security benefits is that you'll have a larger guaranteed income for the rest of your life once you eventually begin claiming benefits. The problem is, you'll also have a number of years when you get $0 in benefits that you'd have otherwise received.
You need to account for these missed benefits when you factor in whether you should delay claiming. There's some simple math you can do to find out how long it will take you to break even if you delay benefits. You can also refer to this chart, which shows the number of years it would take to make up for missed benefits with extra income you get by delaying your claim.
If your benefit at a full retirement age of 67 would be $1,404, claiming at 62 would reduce your benefit to $983 -- but you'd get five extra years of benefits. It would take you 11.7 years of receiving a higher benefit starting at 67 to make up for those years of missed benefits. You'd be 78.7 before you broke even. The only problem is, a 2017 report from the National Center for Health Statistics estimated average life expectancy for Americans in 2016 at 78.6.
Sure, you might live longer -- but you might not. And if you don't live long enough to break even, you've given up extra income that could have made the life you did have left more enjoyable.
4. Rising costs of living mean future benefits buy less
A dollar today is worth more than a dollar tomorrow, thanks to inflation. This is true of Social Security benefits, too. While benefits are supposed to keep pace with rising costs due to an annual cost-of-living adjustment, the metric used to measure annual Social Security raises doesn't accurately reflect actual rising costs in the spending categories where seniors put most of their money.
Social Security cost-of-living increases are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), but urban wage earners and clerical workers don't spend as much of their income on housing and medication as most seniors do.
Unfortunately, both healthcare and housing costs are rising faster than Social Security cost-of-living adjustments.
This means that the Social Security benefits you'll get when you're 67 or 70 won't buy as much as the Social Security benefits you'd get five or eight years earlier at age 62. Claiming benefits as early as possible, before rising costs further erode the actual value of Social Security, just makes sense.
What's the best choice for you?
While all of these arguments are powerful ones for claiming benefits at 62, there are some caveats. First, if you work before full retirement age, your Social Security benefits could be reduced. You'll get credit for this reduction later, but there's no sense in claiming benefits early if you'll immediately lose them anyway because you're still working and earning too much income.
Retiring and claiming benefits early can also pose risks, including the potential that you'll have too little money to live on later in retirement if you don't have enough savings. You can't live on Social Security alone -- especially if you've claimed at 62 and taken a reduced benefit -- and you don't want to retire until you're sure you have the money you need to sustain you.
But if you have enough to live on and you've decided you want to leave the workforce, claiming benefits at 62 is likely a smart move so you can start reaping the rewards of all those years of Social Security taxes you paid.
