What do the statistics say about when to begin receiving Social Security retirement benefits? Hold off. Factoring in expected longevity and benefit payments, 70 is the optimal age for most people.
Of course, many Americans choose not to take that path. Some lose their jobs and file for Social Security early. Others don't think they'll live long enough to make waiting financially worthwhile.
There could even be a different retirement strategy that some could implement that beats waiting. Here's a reason to claim Social Security retirement benefits at age 62 that you might not have thought about.
Image source: Getty Images.
Behind the conventional wisdom
Before we look at this different twist, it's important to understand the conventional wisdom behind waiting until age 70 to receive Social Security benefits. The logic is simple.
If you begin receiving benefits before your full retirement age (which is 67 for anyone born in 1960 or later), you'll be penalized. Claiming Social Security at 62 could reduce your benefits by up to 30%.
On the other hand, if you delay collecting retirement benefits beyond your full retirement age, you'll increase your monthly payment. For anyone with a full retirement age of 67, waiting until 70 will boost your benefits by 24%.
There's only one prerequisite for increasing your lifetime benefits by pushing back when you begin collecting Social Security: You'll need to live long enough for the cumulative amount of your higher monthly payments to outweigh the monthly payments you didn't receive by holding off. A study conducted last year found that over 90% of Americans who haven't yet retired will make more over their lifetime by waiting until 70 to receive Social Security benefits.
Another alternative
Now let's examine the other alternative that could make claiming Social Security benefits at age 62 the best financial strategy. All of the number crunching performed to justify waiting to collect benefits makes a big assumption: You'll spend the money received from Social Security during your early years of retirement.
That's a perfectly valid assumption, in most cases. But instead of spending the Social Security benefits that begin flowing at age 62, some individuals could instead invest the money.
Investing the money received from Social Security changes the dynamics significantly. It's possible that the benefits you'd receive between ages 62 and 70 could be invested in a way where that money grows enough to make you more money over your lifetime by retiring early at 62 than by waiting.
I won't get into all of the detailed math required to determine exactly what rate of return you'd need to make for this approach to be financially advantageous. However, your Social Security benefits increase by roughly 6% for every year you wait to collect them through a full retirement age of 67 and then by 8% per year after that, through age 70. Your investing returns would need to beat these rates (after taxes and inflation).
Major caveats
There are some major caveats to following this approach. For one thing, you'd need to have a source of income large enough to meet your financial needs between the ages of 62 and 70.
You could continue working, but if you make more than a specified limit ($21,240 in 2023), Social Security will deduct $1 from your benefits for every $2 you make above the limit. In the year you reach your full retirement age, the amount deducted changes to $1 for every $3 you make above the limit.
Also, the Social Security benefits formula uses your 35 highest earning years. If your salary between the ages of 62 and 70 is higher than in previous years, your investments will have to generate a higher rate of return.
Most importantly, there's a significant risk that you won't be able to generate the needed investment returns to come out on top. Sure, it's possible to do so, but there are no guarantees.
This is an often overlooked reason for claiming Social Security benefits at age 62. But for most people, it's a good one to ignore.
