Most Americans take Social Security at their earliest opportunity, which under current law is at age 62. Increasingly, though, financial experts have questioned the wisdom of taking early benefits at 62. That leaves many near-retirees confused about what to do.
To explain some of the reasons why waiting beyond 62 to take benefits can be smart, we asked three Motley Fool contributors to share their thoughts on this contentious issue. Weigh these arguments and see whether they apply to your financial situation in retirement.
One reason it can be a mistake to take Social Security benefits at 62 is that most people will earn far less in total Social Security benefits by claiming them at 62, rather than their full retirement age.
After working your whole life, you are entitled to a monthly Social Security benefit which is called your "primary insurance amount." You get this amount by claiming Social Security at your full retirement age (which, for those born between 1943 and 1954, is 66).
You can claim Social Security benefits as early as age 62, but then your benefits will be 25% lower than your primary insurance amount.
By claiming at age 62 you get an additional four years of checks compared to someone who claimed at age 66. However, over time, those who wait to claim generally catch up and surpass those who claim early in terms of cumulative Social Security benefits received. Those who claim at their full retirement age break even with those who claim early at age 78. This is known as the Social Security benefits early breakeven age.
That may seem like a long time to wait. However, most people who make it to age 62 will live past age 78. Using the Social Security Administration's 2010 life tables, of those who have made it to age 62, 65% of men and 75% of women will live at least until age 78. That means the majority of Americans would receive more in lifetime benefits if they waited until their full retirement age to claim them, rather than taking them early at age 62.
In addition to the fact that your benefits go up each year you wait to collect, there's another benefit to delaying Social Security.
For many people, the last few years they work are some of their highest-earning years. And because Social Security is based on a weighted average of your highest 35 years of income, choosing to prolong your career when you are getting paid most could significantly increase your benefits.
Consider this simplified example. Let's say that you start your career at age 25 and earn $40,000 in your first year and get an annual (inflation-adjusted) 2% raise. If you retire at age 62, the average of your 35 best years will be $60,634. However, if you wait until age 67, the average used to calculate your benefits will be $66,945. This is enough of a difference to have a significant impact on your benefit.
So, if you wait another five years past age 62, not only will delayed-retirement credits boost your benefit about 42%, but you'll also get an additional increase if your 35-year average goes up as a result of working longer while your salary is higher.
One unintended consequence of allowing Americans to claim Social Security retirement benefits at age 62 is that it prompts many workers to consider quitting their jobs at that relatively young age, even if they'd be happier and more financially secure if they extended their careers. It's true that many of those who work in physically demanding professions are more than ready to retire in their early 60s, but for workers in white-collar jobs, working beyond full retirement age can be both monetarily and psychologically rewarding.
By contrast, many of those who retire early find that they don't enjoy retirement as much as they had anticipated. Facing the reality of living on a fixed budget (especially if it's supplemented by reduced Social Security benefits), retirees sometimes find themselves forced to return to work. Often it's impossible to return to work at your former job if you change your mind about retirement, so workers face the difficulty of finding new work late in their careers. Even those who are lucky enough to find work often have to take lower-paying jobs to make ends meet.
Obviously, some people are happiest retiring at age 62. For others, though, it can be a big mistake that they regret in time.