Here's some good news to ponder as you near the end of your working life. You have some control over the income you receive from Social Security. There are a few levers you can pull, but one of the most influential is the timing of your first Social Security claim.
The earliest you can start receiving benefits is age 62 and the latest is age 70. Claiming earlier gives you income up front, but it comes with a major drawback. Your benefit amount will be lower. And, depending on your finances, that could be reason enough to delay your Social Security application well past your 62nd birthday.
The mechanics of claiming Social Security at 62
When you claim Social Security at age 62, your benefit is reduced. Social Security bases the reduction on the number of months between your claiming age and your full retirement age (FRA). Your FRA is between ages 66 and 67, depending on your birth year.
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If your FRA is 67 and you start receiving Social Security at age 62, you've claimed a full 60 months early. In this case, your benefit reduction is calculated in two phases:
- For each of the first 36 months, your benefit is reduced by five-ninths of 1%. That adds up to 20%.
- For each of the remaining 24 months, your benefit goes down by five-twelfths of 1%. This equates to 10 additional percentage points, bringing the total reduction to 30%.
That'll reduce an expected $1,600 monthly benefit at FRA to $1,120.
Your income available from other sources
Forgoing $480 monthly to claim early may or may not be a good trade-off. This usually depends on your income available from other sources, like savings and pension. If you can make ends meet without that $480, great. You have the option to claim Social Security early and enjoy a nice, long retirement.
Sadly, that is the less-common scenario. Research company Statista estimates the average value of retirement savings for U.S. adults aged 60 to 64 at about $222,000. Assuming a 4% withdrawal rate, that savings balance will provide income of $8,800 annually.
That income isn't enough for a comfortable retirement lifestyle. At that savings level, with no pension or other income source, you probably can't afford to forgo any of the Social Security benefit coming to you.
Other advantages of delaying retirement
Holding off on retirement helps you secure a bigger Social Security check, but there are other benefits too. If you can keep working, you'll have more time to pad your savings account. You also reduce the numbers of years you'll be drawing income from your savings account.
Keep working and you can continue using your work-sponsored healthcare benefits, too. Without them, you may need pricey private health insurance until you can get Medicare at age 65.
The wait-and-see approach
Practicalities may convince you not to claim Social Security at age 62. Know that you can take a wait-and-see approach. In other words, keep working and contributing to your savings -- and see how your finances and your expected Social Security benefit evolve.
Each month you keep working should strengthen your finances incrementally. It may not take long to start feeling comfortable about saying goodbye to your paycheck.
