Few decisions will affect your finances as much during your retirement years as when you begin collecting Social Security benefits. Your choice will have repercussions that go on for the rest of your life.
Many Americans opt to receive their Social Security retirement benefits as early as possible -- age 62. Others prefer to wait until their full retirement age (which is 67 for anyone born in 1960 or afterward) or hold off even longer.
Should you take Social Security at age 62 or 67? Here are three reasons to consider splitting the difference.
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1. Your penalty will be lower.
The biggest drawback to receiving Social Security retirement benefits at age 62 is the steep financial penalty. Your monthly payment will be 30% lower than it would be if you waited until a full retirement age of 67.
Splitting the difference between collecting benefits at 62 or 67 by starting at age 64 or 65 (or somewhere in between) could be a good middle-of-the-road answer. It would allow you to reduce the early retirement penalty while also enabling you to retire earlier than the normal retirement age.
2. Your full benefits could be higher.
There's another potential financial advantage to waiting two or three years to collect Social Security instead of beginning at age 62. Your full benefits could be higher, even without factoring in the penalty.
How? The Social Security Administration (SSA) calculates retirement benefits based on a formula that uses the 35 years of your working career where your earnings were the highest. For many, if not most, Americans their highest-earning years are later in life. Working another couple of years or so, therefore, could boost your retirement benefit if you're making more during those years than you did throughout the rest of your career.
3. You'll be closer to Medicare eligibility.
Healthcare ranks as one of the biggest expenses for seniors. It's important to have health insurance when you're retired to help protect you from being wiped out financially in the event of a major health problem.
If you rely on employer-sponsored health insurance, you could have to foot the bill completely on your own if you retire at age 62. Some individuals have the opportunity to obtain health insurance from their employers when they retire early, but many don't.
By holding off to retire and collect Social Security benefits, though, you'll be closer to Medicare eligibility. The current eligibility age is 65, so waiting until then could be especially helpful.
Medicare Part A (which covers hospital stays and some other expenses) is free to most Americans. Part B (medical insurance) and Part D (prescription drug insurance) have monthly premiums but can be less expensive than individual private insurance.
The financially optimal age for most Americans
To be sure, the financially optimal age for most Americans to begin collecting Social Security retirement benefits isn't 62, 67, or anywhere in between. Research has found that over 90% of people would receive greater cumulative lifetime benefits by waiting until age 70 to receive benefits.
However, individuals who choose to retire early usually have good reasons for doing so. They can't imagine waiting until age 67 to do so, much less holding off until age 70. For these people, splitting the difference between collecting Social Security benefits at 62 and 67 could be a smart alternative that allows them to make more money during their retirement but still retire earlier than they might have.
