Social Security is a significant source of retirement income, so many people don't retire until they decide to claim it. There are plenty of good arguments for waiting as long as possible to claim your Social Security benefits, but there are also times when taking your benefit early makes more sense. Here are some situations where claiming early can be the best financial move.
No. 1 Health is an issue
Social Security is designed to pay you the same amount in lifetime benefits regardless of when you claim. That's why people who retire early receive considerably less Social Security than they'd receive if they'd waited until full retirement age to claim and considerably more Social Security if they hold off on claiming until after their full retirement age.
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The amount that benefits are reduced or increased, however, is based on life expectancy tables that assume everyone will live to the same average age. That simply doesn't happen. Many people will live much longer than average, and some people will die much younger than average.
If longevity doesn't run in your family and your health has enough question marks to make you think you might not beat the averages, then claiming early could be smart.
Deciding to wait to claim until full retirement age results in more lifetime Social Security benefits only if you live into your late 70s or early 80s. If you don't make it to that point, then your lifetime haul could be smaller if you wait to claim rather than claim at 62.
Chart by author.
No. 2: Your job security is at risk
Most people plan to wait to claim their benefits, according to Nationwide, yet the most common age to begin benefits remains age 62. Why the discrepancy? Often, it's because of an unforeseen job loss.
Of retirees who went the claim early route, nearly one in four told Nationwide it was because they had been laid off or otherwise had become unemployed.
If a job loss is going to result in financial insecurity, you might not have any other option than to claim early, especially if you don't qualify for a pension income. (Spoiler alert: most people don't.)
If you do wind up claiming early because of a job loss and then you secure a job afterwards, you can get a one-time do-over as long as you ask for the clock to be reset within 12 months of starting your benefits. You'll have to return any benefits you've received.
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No. 3: You can invest the money
If you have another source of income in retirement, such as pension income, then it could make sense to go the claim-early-and-invest route, especially if you're concerned that Social Security's financial situation is untenable.
Social Security is funded by payroll taxes on current workers, and those taxes have failed to cover the amount of money that's being paid out to Social Security recipients since 2010. The gap is being filled by tapping Social Security's Trust Fund, but that fund is expected to run dry in 2034, causing an across-the-board 25% cut to everyone's benefits.
Congress is likely to act to avoid that outcome, but the uncertainty may have you thinking it makes sense to take your benefits early and invest them on your own.
For instance, let's say Jim claims Social Security at age 62, his full retirement age is 67, and his full retirement age Social Security benefit is $1,000. Based on the number of months he's claiming early, Social Security will reduce his full benefit by 30%, so he'll receive $700 per month.
Over the past 90 years, the stock market's average annual return is nearly 10%, so let's assume he can earn that annual return if he invests his $700 per month in an S&P 500 index fund. If so, then this strategy would result in an account valued at $133,874.37 in 10 years and $481,110 in 20 years, thanks to compounding, or the ability to earn interest on interest.
That's pretty good, right? Absolutely. But before you decide this Social Security strategy is right for you, you should know there are a lot of times when this approach won't make sense. For instance, if you're younger than full retirement age, Social Security subjects you to an earnings test. If you earn more than what's allowed ($17,640 in 2019), then it will hold back $1 for every $2 in earnings above the limit. Therefore, if you work at a high-paying job, this strategy won't work. Pension income doesn't count toward the earnings limit, though, so if you'll collect a pension at age 62 or your income is near or below the annual limit, then this approach may make sense.
You should also know that Social Security income can be subject to income taxes if your earnings exceed annual limits. For instance, single filers with over $34,000 and married filers with earnings over $44,000 in earnings in 2018 will pay income taxes on up to 85% of their Social Security income. So that has to be factored in before adopting this strategy, too.
There's also the risk that you don't earn the historical average return of the stock market. After all, there are plenty of 10-year periods when returns have lagged the historical average and, because of recessions, many years in which investors lost money on their investments. As they say, past performance does not guarantee future results.
Nevertheless, if you're among those who can make this strategy work, then it could pad your net worth and increase the value of the estate you leave your family, making claiming at 62 worth considering.
