5 Reasons to Claim Social Security Before 65, and 5 Reasons Not To

Social Security serves as the foundation of most Americans' retirement plans. When it comes time to claim your benefits, your eventual monthly check will be based on the income you earned throughout your career and the age at which you start taking benefits. You can claim retirement benefits starting at age 62, and your monthly benefit grows the longer you wait, up until you reach age 70.

Traditionally, the full retirement age where you would receive your scheduled benefits was 65, which made that a great target age for claiming benefits. The rules have changed since the program started, and what may have made sense before doesn’t necessarily make sense today. With that in mind, here are five reasons to claim Social Security before 65, and five reasons not to.

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Just because you're done earning a paycheck doesn't mean you're done spending money. You still need to put food on your table, pay rent or taxes (at minimum) on the dwelling that table is in, and cover utilities, clothing, medication, and the other basic costs of living. Especially if you have no other source of funding for your costs, even at a reduced level from starting early, your Social Security benefit can help you cover them.

ALSO READ: 3 Signs You're Ready to Claim Social Security

Your Social Security retirement benefits start when you claim them and continue throughout the rest of your life. If illness, family history, or lifestyle choices give you a good reason to believe you will pass away at a fairly young age, go ahead and claim early. You'll maximize the total you collect if your retirement is cut short, and if you manage to outlast your expectations, you'll still get the benefit you signed up for when you decided to collect early.

Typical financial guidance indicates that you should not have money invested in stocks that you expect to spend within the next five or so years. If Social Security is covering a portion of your expenses, your portfolio won't have to. The money you would otherwise have had to shift from stocks to assets with lower potential returns to cover those expenses can stay invested in stocks longer. That can lead to higher total account balances and the ability to spend more overall throughout your retirement.

Most people receiving both Social Security and Medicare benefits have their Medicare Part B premiums deducted directly from their Social Security checks. Those premium costs may increase each year based on increases in the costs of medical care. If the Medicare Part B premium increase is higher than the dollar amount of your Social Security benefit inflation adjustment, your Part B premium increase will be capped at the increase of your Social Security benefit.

In other words, if Medicare Part B's premiums are scheduled to increase by $20 a month and your Social Security is to increase by only $10 a month, your Part B premium will go up by only $10 a month. The Medicare premium increase will eat up all but not more than the increase in your Social Security check. For that to work, though, you have to be receiving both Social Security and Medicare. If you haven't signed up for Social Security yet, you don't get the benefit of that provision and have to pay the full $20.

The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

If you have a significant balance in traditional retirement accounts, you might want to take advantage of low income levels during the early years of your retirement to convert those accounts to Roth IRAs. One key reason for this is that once you reach age 72, you’re typically required to take distributions from those traditional accounts, but not from your Roth IRA.

Those mandatory distributions can get pretty steep later in your retirement and subject you to both heavy taxes and income-based increases in your Medicare premiums. Those mandatory distributions are based on both your age and your account balances in those traditional accounts at the end of the previous year. The lower their balance, the lower your mandatory distribution.

The more money you convert to a Roth IRA early in your retirement, the lower your account balance later in retirement, as both the converted amount and any growth on it will be in the Roth instead. That tamps down on the required distributions and their tax and Medicare premium impacts later.

The downside of making Roth IRA conversions, however, is that you generally need cash outside your retirement account to pay the tax on the conversion; otherwise, the conversion itself makes less sense. Taking Social Security early can give you money to help cover the conversion taxes and keep more of your money working for you inside your newly converted Roth IRA.

ALSO READ: Why Investing in a Roth IRA May Make More Sense Than Ever

One key thing to recognize when it comes to claiming benefits is that if you're still working and you're below your full retirement age, it can get very expensive to claim your Social Security benefits. Social Security penalizes you for claiming while you're still working if you're below your full retirement age. In 2020, that penalty is as much as $1 for every $2 you earn above $18,240 in the year.

People turning 65 in 2020 were born in 1955. For them, full retirement age is age 66 and 2 months. If you were born after 1955, your full retirement age is even later -- as late as age 67 for those born in 1960 or beyond.

There is a clear time versus money trade-off when it comes to claiming your Social Security benefits. The later you wait -- up until age 70 -- the larger each check will be, but the fewer the total number of checks you will receive throughout your lifetime.

If you live long enough -- generally somewhere in your early to mid-80s -- you'll reach your break-even age. From that point on, every check you receive will represent more money in your pocket from the program for having waited than for having started early.

It's important to note that, for most people, spending on things other than health-related items tends to either hold steady or decline as we age. As a result, consider not only how long you'll live but also how long you'll be active when deciding whether to delay your benefits.

For every year you wait between your full retirement age and age 70, your monthly Social Security benefit increases by 8% of your base amount. While investment returns above that rate may be possible, they certainly don't come with the same government-backed guarantee that Social Security's benefit formula does. As a result, if you've got the income or assets to allow you to wait before you start collecting, that much more of your retirement costs can be covered by that guaranteed check.

Social Security's benefits adjust for inflation every year, and the dollar amount of your inflation adjustment depends on the current dollar amount of the benefits you're receiving. A 2% inflation adjustment on a $1,000 benefit will get you $20 more each month, but the same 2% inflation adjustment on a $2,000 benefit will get you $40 more each month.

That difference is especially important to consider when Medicare is involved. In the same scenario as above, if the Medicare Part B premiums increase by $25, the person whose benefit is $1,000 per month would see the entire inflation adjustment eaten by the Medicare Part B increase. The person whose benefit is $2,000 per month would still have another $15 more each month to help cover higher costs of living elsewhere.

ALSO READ: Cost of Living Calculator: How Inflation Affects Your Standard of Living

If you've got enough assets in after-tax accounts to cover the conversion taxes -- or if you're not going to do Roth IRA conversions at all -- then it might make sense to wait on your Social Security, which is is tax advantaged. If it's your only source of income, it might even come to you completely federally tax-free. Even if it is subject to tax, in the worst case, only 85% of your Social Security income may be taxable on a federal basis, and several states exempt Social Security from state income taxes.

As a result, a plan designed around maximizing Social Security income while minimizing other sources of retirement income may help you keep your total tax costs down in retirement. That would argue for delaying filing for your Social Security benefit until as close to age 70 as you can while structuring any other assets you own in a way to minimize the income they generate.

The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

As you can tell, there are several reasons to consider taking your Social Security benefits early and several other ones for delaying. While that may seem a little confusing as you're trying to make a decision, it can actually be quite liberating.

If one or more of those reasons is compelling based on your personal situation, it can help you make the right decision for your individual circumstances. On the other hand, if none of them seem compelling based on your personal situation, then that could be a sign that the risks and rewards of waiting versus starting early are that much more balanced for you. In that case, the decision ultimately may not matter as much as you initially thought it might.

If you're in that later camp, you can rest assured that no matter what age you choose to start collecting your benefits, it's probably a reasonably decent decision for you. Just recognize that Social Security itself indicates that the program is not designed to be your only source of money to cover your retirement costs. With a reasonable end-to-end plan that incorporates Social Security as part of that plan, you'll have better financial flexibility to handle whatever the future may bring your way.

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