Some people have been making the argument that it is smart to take Social Security at 62 in order to facilitate an early retirement and live a longer, more stress-free life. This is terrible advice, and I urge people to look at the facts. There are two big reasons why, if you're able, you should work longer and wait until your full retirement age to take Social Security.
1. Most retirees will live longer than the average life expectancy
One reason some argue that it's smart to take Social Security early is that, while your monthly checks are reduced by 25% for the rest of your life, you get four extra years' worth of checks more than you would by claiming at your full retirement age, assuming a full retirement age of 66.
If you claim Social Security benefits early, you'll be ahead in terms of total Social Security benefits received until you turn age 78, which is the breakeven point where you would have received the same amount by claiming benefits at your full retirement age. Beyond age 78, though, those who claimed Social Security at their full retirement age continue to receive a 33% larger check than those who claimed early, and thus the gap will steadily widen in terms of total Social Security benefits received.
Age 78 is the average life expectancy of Americans, which is why the Government Accountability Office, along with those in favor of claiming early, point out that "someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim." However, this statistic is somewhat misleading.
If you're aged 62, then you're already ahead of the game in terms of life expectancy, and you should expect to live longer than the average American. According to the Social Security Administration's life tables, 62-year-old males on average live another 20 years to age 82. Of that group, 65% will live to see age 78. Meanwhile, females aged 62 live, on average, to age 84, and 75% will make it to at least age 78. Therefore the majority of Americans would receive more in cumulative Social Security benefits by waiting until their full retirement age to claim them.
I also want to point out that the Social Security Administration's life tables are based on 2010 data. The International Monetary Fund has shown that forecasters around the world have consistently underestimated how long people will live by an average of three years. Given the accelerating progress of technology and medical research, people will likely live longer than the current data suggests.
2. It's financially smarter to work for a few more years
First, many jobs come with health insurance, which is a widely undervalued benefit, as health insurance is expensive for the 50- to 65-year-old crowd. At 65 you become eligible for Medicare, which takes this expense off your hands.
Second, most people's highest-earning years are in their 50s and 60s. Delaying retirement in order to put away a few extra years' worth of savings can mean a much more secure retirement. Every year you wait to retire will improve your financial situation for the rest of your life, as you gain an additional year of saving, give your portfolio another year to grow, and allow your eventual Social Security benefit to rise by about 8%.
For example, let's say you earn $50,000 and contribute $7,000 per year, or 15% of your income, to a 401(k). If your retirement savings are $500,000 at age 62 and you achieve 5% growth in your portfolio, then your nest egg will grow to $638,000 by the time you retire at age 66. If you instead retired at 62 and withdrew 4% of your savings at the beginning of each year, assuming the same growth rates, you would have just $516,000 at age 66 -- that's 20% less money to last you for the rest of your life, in addition to 25% smaller Social Security checks.
Prepare yourself for a long, full retirement
Retirement is a great time for adventure and discovery, but you need to make sure you're prepared for the challenges you will face over those 20 to 40 years. For the reasons above, if you have the choice, I would think twice before retiring early.