When it comes to Social Security, it can be tempting to take the money and run as soon as you're eligible—typically at age 62. After all, you've likely been paying into the system for all of your working life, and you're ready to receive your benefits. Plus, guaranteed monthly income is nice to have.
Health status, longevity, and retirement lifestyle are 3 key factors that can play a role in your decision when to claim your Social Security benefits. You may not be able to predict your future health status, given the uncertainties that many people are dealing with during the COVID pandemic, but you can rely on the simple fact that if you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement over the next 20-30+ years.
If you start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect a 30% reduction in monthly benefits with lesser reductions as you approach FRA. Remember, FRA is no longer age 65: It's 67. (See your full retirement age.) And your annual cost-of-living adjustment (COLA) is based on your benefit. So if you begin claiming Social Security at 62 and start with reduced benefits, your COLA-adjusted benefit will be lower too.
The COLA feature can be especially valuable when you experience high inflation during your retirement. Delaying Social Security can create a larger retirement income than is protected from inflation.
Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay your claim past your FRA, you get an 8% increase in your benefit. That could be at least a 24% higher monthly benefit if you delay claiming until age 70. But, make sure to evaluate your decision based on how much you've saved for retirement, your other sources of income in retirement, and your expectations for longevity.
While many people could benefit from waiting to age 70 to take Social Security payments, others may need this source of guaranteed income sooner to help pay their bills, or they may anticipate not living long enough to reap the rewards of delaying.
The downside of claiming early: Reduced benefits
Consider the following hypothetical example. Colleen is 62 as of 2022. If Colleen waits until age 67 (her FRA) to collect, she will receive approximately $2,000 a month. However, if she begins taking benefits at age 62, she'll receive only $1,400 a month. This "early retirement" penalty is permanent and results in her receiving 30% less year after year.
However, if Colleen waits until age 70, her monthly benefits will increase another 24% over what she would receive at her FRA, to a total of $2,480 per month.1 If she were to live to age 89, her lifetime benefits would be about $112,000 more, or at least 24% greater, because she waited until age 70 to collect Social Security benefits.2 (Note: All figures are in today's dollars and before tax. The actual benefit would be adjusted for inflation and would possibly be subject to income tax.)
Spouses and Social Security
You can claim Social Security benefits based on your spouse's work record. If claiming spousal benefits provides more, claiming before your FRA on a spouse's record means you'll lose even more than claiming on your own record—the benefit reduction for a spouse is 35% while the reduction for claiming your own benefit is 30%. For instance, if you're the spouse of Colleen in the above example and you are the same age, you'd be eligible for only $650 a month at age 62—35% less than the $1000 a month you would get at your FRA of 67.
Your decision to take benefits early could outlive you. If you were to die before your spouse, they would be eligible to receive your monthly amount as a survivor benefit—if it's higher than their own amount. But if you take your benefits early, say at age 62 versus waiting until age 70, your spouse's survivor Social Security benefit could be 30% less for the remainder of their lifetime.
Bridge to Medicare at age 65
Remember that while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments.Retiring before 65? Explore health insurance options and estimate potential costs before you’re Medicare-eligible.
Financial benefits of working longer
Many people want to retire as soon as it is financially feasible to do so, but it's crucial to consider the earning and investing power you may give up if you stop working full-time and take Social Security at 62. If you leave a job with good pay and benefits, it may be difficult ever to regain that level of compensation if you need or want to return to work later. Of course, not everyone can keep working, but it is something to consider if you are healthy and have the opportunity to stay in the workforce, in either a full-time or part-time capacity.
The compensation benefits of your job could also affect your Social Security. Some companies allow stock awards to continue to vest (pay out, and as a result, incur income taxes) after retirement date, and even into years to follow. These payouts are considered income, and could cause your Social Security payment to be taxed, or taxed at a higher level than in years after the awards have fully distributed. Delaying Social Security payments until those other income sources have been reported for tax purposes is worth consideration.
Tip: Women often live longer than men, and they're more likely to depend on one income when they're older. Don’t make the mistake of coupling your decision to leave the workforce, especially during COVID, with your Social Security claiming strategy. Remember, by the time you get into your 80s, you have fewer financial options, so don't jump at the first opportunity to claim Social Security at age 62 just because you may want to quit your current job.
But there's even more to the story. As you approach retirement, you're often at the upper end of your lifetime earnings trajectory—and of your ability to save more for retirement. In addition, if you can keep working, you can make "catch-up" contributions to a tax-deferred workplace savings plan like a 401(k) or 403(b) or a traditional or Roth IRA. Catch-up contributions allow you to set aside larger amounts of money for retirement.
Remember, if you decide to stop working at 62, you will cease tax-advantaged saving opportunities, and if you decide to claim Social Security early, you will cap your Social Security benefits throughout your retirement—and you will have a smaller benefit base for COLA adjustment, which can be disadvantageous during high inflation.
When you factor in longevity, health care, and the cost of your expected lifestyle in retirement, your decision on whether or not to claim Social Security at age 62 may become clearer.
Read Viewpoints on Fidelity.com: Social Security tips for working retirees