One of the most controversial questions in personal finance is when people should start taking their Social Security benefits. Yet while there will never be complete agreement about when the best time to file for benefits is, there is at least something of a consensus about when it doesn't make sense to do so.
The age you are when you claim Social Security will have a significant impact on how big your monthly checks will be. Many people are hazy on what the calculation that determines that looks like, but if you look at the formulas, you'll see some idiosyncrasies that make certain ages less than ideal.
How claiming early hurts your benefits
When the federal government started allowing people to claim Social Security before their full retirement age, it wanted to make sure that those claiming early didn't get an unfair advantage from receiving more payments. The Social Security Administration therefore implemented a formula that reduced the size of the monthly checks that early claimants received. Those reductions were calibrated so that, assuming people lived to their average life expectancy, the total amount of money they would receive from the program would be about the same, regardless of when they chose to start receiving benefits.
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At the time, the full retirement age was 65, and the SSA's rule reduced benefits by five-ninths of a percentage point for every month someone claimed early. Those claiming retirement benefits at the earliest possible age -- 62 -- would thus receive monthly payments amounting to 80% of what they'd have gotten if they had waited until they were 65. It was a straight-line rule, and it made it relatively simple to calculate how claiming early would affect your monthly checks.
Later, lawmakers implemented a slow increase in the retirement age from 65 to 67. At the same time, lawmakers changed the formula for calculating reductions for early claimants. Beyond the first 36 months, the SSA cuts benefits by five-twelfths of a percentage point per month -- or about 0.42%, versus 0.56% for the first 36 months.
How the Social Security formula makes claiming at 63 or 64 less attractive
Because of that change, claiming Social Security at 63 or 64 won't make as much sense for many recipients as other ages. Consider the following chart, which shows how much someone with a full retirement benefit of $1,500 per month at age 66 would get based on different claiming ages:
|
Age Claimed |
Monthly Benefit |
Change Compared to Claiming One Year Earlier |
|---|---|---|
|
62 |
$1,125 |
- |
|
63 |
$1,200 |
6.7% |
|
64 |
$1,300 |
8.3% |
|
65 |
$1,400 |
7.7% |
|
66 |
$1,500 |
7.1% |
Chart by author.
As you can see, you get the smallest percentage increase in your monthly benefit by waiting from 62 to 63. After that, waiting an extra year gets you larger increases.
A similar thing happens for those whose full retirement age is 67:
|
Age Claimed |
Monthly Benefit |
Change Compared to Claiming One Year Earlier |
|---|---|---|
|
62 |
$1,050 |
- |
|
63 |
$1,125 |
7.1% |
|
64 |
$1,200 |
6.7% |
|
65 |
$1,300 |
8.3% |
|
66 |
$1,400 |
7.7% |
|
67 |
$1,500 |
7.1% |
Chart by author.
Here, the increase from 62 to 63 is a little bigger in percentage terms, and the lowest increase comes between 63 and 64.
Wait just a little bit longer
As it happens, most people intuitively seem to understand the trade-offs involved. A huge number of Social Security recipients claim at 62, but relatively few claim at 63 and 64. Larger sets of recipients wait until either 65 or their full retirement age to claim benefits, in part because many still consider 65 the appropriate age to retire despite the changes to what Social Security deems your full retirement age.
The debate over whether it's best to claim Social Security at 62, 70, or your full retirement age will rage on, and you'll have to come to your own personal decision about what timing works best for you. But when it comes to claiming at in-between ages like 63 and 64, there are solid reasons to avoid it if you can.
