Should you take Social Security at 62? Or, should you wait until your Full Retirement Age or later? Taking Social Security early can be a mistake that costs some retirees $100,000 or more in retirement benefits. However, in some cases taking Social Security at 62 is just the right decision. In this episode we’ll dive into the pros and cons of taking Social Security at 62.
KNOW YOUR FULL RETIREMENT AGE
Before jumping into Social Security, it’s important to understand a couple of key terms. The first term is PIA or Primary Insurance Amount. This is the amount of your benefit when you reach Full Retirement Age (FRA) or Normal Retirement Age.
Your primary insurance amount is based on your highest 35 years of working history, indexed for inflation. If you have years where you have zero earnings and only have 15 years of working history, those zero years would be a part of the calculation.
Your Social Security benefit will be based on your Primary Insurance Amount. If you were born between 1943-1954 your FRA is 66. Then for every year between 1955 to 1959 they had two months to your FRA. If you were born in 1955 your FRA is 66 and 2 months, in 1956 it would be 66 and 4 months, in 1957 – 66 and 6 months, in 1958 – 66 and 8 months, and 1959 – 66 and 10 months. If you were born in 1960 or later your FRA is 67.
You can see your FRA on your Social Security statement and can register for an online account at ssa.gov.
REDUCTION IN BENEFITS AT 62
If you’re contemplating taking your benefits at 62, or anytime before your Normal Retirement Age, you’ll receive a reduced benefit. If a person’s FRA is 66 and they decide to take their Social Security benefit at 62, their benefit will be reduced by 25% of their Primary Insurance Amount each month. This 25% reduction is a permanent reduction, meaning it won’t increase later except for cost of living adjustments (COLA). Some people mistakenly believe that their FRA benefit will increase to 100% of PIA but that isn’t correct. This is a permanent reduction based on a reduced portion of your PIA.
UNDERSTANDING THE IMPACT OF THE EARNINGS TEST
If you decide to claim benefits early, it’s important to be aware that you’ll also become subject to the earnings test, if you continue to have earned income. Note that there’s a difference between earned income and ordinary income. Earned income looks at wages and doesn’t include other income sources such as pension, real estate, investments, and retirement accounts withdrawals.
Basically, $1 in benefits will be withheld for every $2 of earnings above the limit of $18,960 (for 2021). This means that your Social Security income can be reduced if you make above the threshold. As an example, say you made $40,000 in earned income. They would reduce your Social Security by $10,520 that year ($40,000 – $18,960/2 = $10,520). These thresholds change in the year you reach FRA.
It’s important to understand that though your Social Security benefit is reduced, it isn’t permanently lost. It will be added back to your benefit after FRA.
WHAT HAPPENS IF YOU TAKE SOCIAL SECURITY LATER
If you reach FRA and still haven’t claimed Social Security, your benefit will increase 8% per year until you reach age 70. It doesn’t ever make sense to wait after age 70 to take your benefit. (As a side note, while we haven’t addressed the spousal benefit in this article, it won’t experience any increase after FRA, so your best option is to take any spousal benefit no later than at your Full Retirement Age.)
Another way of looking at delaying Social Security benefits is that you’ll be getting 8% per year on your Social Security money. If you could get a guaranteed 8% per year on your other investments with no risk would that be a good investment? It certainly would! While Social Security isn’t an investment, when you compare it to your other retirement assets, it can make a lot of sense to delay claiming. In a free on-demand class I created I showed one case study where a family delayed Social Security but still retired early, and it made an estimated difference of $186,000 during retirement!
You can get access to this free one-hour Social Security Masterclass. Just go to thriverp.com/ss and you can gain instant access to the class. I go into a lot more depth than I can cover in a podcast article and episode.
Here are some reasons when delaying Social Security can make sense:
- You want to maximize your retirement income
- You’re still working and you like it
- Your spouse’s survivor benefit will be much larger (I cover this in the free Social Security Masterclass as well)
- You’re healthy and expect to live a long time
COMPARISON BETWEEN TAKING SOCIAL SECURITY EARLY OR LATER
To make it real, I ran some numbers using our Social Security software. We utilize this software when we put income plans together for clients and it helps analyze a number of different scenarios.
This particular example is based on a 2% average annual cost of living adjustment and $750 per month of Social Security benefit at 62. I then ran a comparison of the claiming strategy, whether at 62 or 70.
If this person lived to 75:
- Start at 62: $137,423 —– $36,984 Higher
- Start at 70: $100,439
If this person lived to 85:
- Start at 62: $269,953
- Start at 70: $333,697 —– $63,744 Higher
If this person lived to 95:
- Start at 62: $431,456
- Start at 70: $617,941 —– $186,485 Higher
WHEN SHOULD YOU TAKE YOUR SOCIAL SECURITY AT 62?
As we’ve discussed, one of the largest risks to taking Social Security early is longevity, or how long you live. If you were to start your benefit early, you’ll obviously get many more checks than if you waited but at some point the delayed credit has a crossover point, usually anywhere between ages 78-82.
In my mind, there are 4 primary reasons that you might want to take Social Security early:
- You don’t think you’ll live a long life – based on your current health or your family history you don’t think it’s wise to delay claiming Social Security.
- You hate your job – this last year I worked with a client who was simply done. He wanted to retire yesterday.
- You don’t think Social Security will be around – you just want to get it while it’s available
- You’re willing to sacrifice retirement income for the start of retirement
DON’T MAKE YOUR SOCIAL SECURITY DECISIONS IN A BUBBLE
You’ve paid your whole life into Social Security and it will most likely be a cornerstone of income during your retirement journey. Choosing whether to take your benefit early, at Full Retirement Age, or at 70 can make a significant difference in your retirement lifestyle. Don’t make your Social Security decisions in a bubble, meaning – you should take taxes and your other investments and income strategy into account to create a comprehensive income plan. By looking at how much income you need during retirement, assessing your investment accounts, and then looking at your Social Security benefits, powerful retirement decisions can be made.
Do you have a plan to transition into retirement? Do you understand it? Are you confident in your plan? Learn more about how we help our clients replace their paycheck income, manage their investments, make Social Security decisions, and minimize retirement taxes. You can set up an appointment by calling 801-810-8434. Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass.