When it makes sense to claim social security early

Income from social security is an important calculation when it comes to your retirement. Most people try to wait as long as possible to start collecting social security, as this maximizes the amount you can receive. But there are some situations when it makes more sense to claim your social security early, even if it decreases the amount you’ll receive slightly.

A Refresher on Social Security Benefits, Including Early Collection

From the perspective of social security, full retirement age is either 66 or 67. If you were born before 1954, it is 66. If you were born after 1960, it is 67. If you were born in the intervening years, it is somewhere between this, with the age increasing by two months for each birth year. So, those born in 1955 reach full retirement at 66 years and two months, and those born in 1956 reach it at 66 years and four months.

While your age of full retirement is 66 to 67, you can choose to collect social security benefits starting at just age 62. However, you will receive less if you do. If you can wait until you are 70 to start collecting, you can receive even more than at 66 or 67.

How Much Early Collection Reduces Your Benefits

The following shows how much your social security retirement benefit would be reduced by if you choose to start collecting it at age 62.

  • Born in 1958: Reduced by 28.33% for you; spousal benefit reduced by 33.33%
  • Born in 1959: Reduced by 29.17% for you; spousal benefit reduced by 34.17%
  • Born in 1960 or later: Reduced by 30.00% for you; spousal benefit reduced by 35.00%

As a refresher, the spousal benefit is up to 50% of the worker’s benefit. The reduction in spousal benefits applies after that 50% is applied.

How Much Delayed Collection Increases Your Benefits

On the other end of the spectrum, if you choose to delay how long you wait to start collecting social security benefits, you can increase the amount you receive. There is an increase each year, up to age 70.

The increase amounts to 8% per year, broken down to 0.66% every month. This is the case regardless of the year you were born.

With that background in mind, explore some of the situations when you may want to consider collecting social security benefits early.

Benefits While Working

Interestingly, you can continue earning money without it affecting your social security benefits, as long as you’ve already reached full retirement age.

However, if you choose to start collecting at age 62 and are still working, you may not receive the full benefits. There is an annual limit to how much you can earn without seeing a reduction in your benefits. For 2021, it is $18,960. After this, each $1 you earn will deduct $0.50 from your benefits.

If Your Investment Skills Can Deliver Higher Returns

Based on the above information, you can maximize your monthly social security benefits by waiting until you are 70 to start collecting. You get an extra 8% per year. By age 70, this can mean an increase of 24%.

This is a very good return rate, but some savvy investors may think they can do better. It is definitely possible to get a better return than 8% annually, but there is no guarantee.

You should exercise a great deal of caution before collecting early for this reason. Remember that investments with higher return rates tend to be riskier. Even without added risk, markets are unpredictable, so this could also lead to you losing money.

You can run what-if and break even scenarios for Social Security benefits using good retirement planning software that is on the market today. Planning applications such as WealthTrace allow you to put in your entire financial plan and run Social Security scenarios. Simple calculators like AARP offers are also a great place to start.

If You Want to Make the Most of Early Retirement

For most people, you will be healthiest during the earlier years of your retirement. This means that you may want to spend more money on things like traveling and hobbies during that period. In that case, you may need the income from social security early to help fund those activities. Maybe receiving less per month is fine since you don’t plan to travel as much in the later years.

This will require you to weigh the pros and cons. Additionally, don’t forget to factor in any later health or care-related costs you may have as you age.

If Your Health Isn’t Great

Depending on your current health, you may want to consider collecting social security early. You may need the extra income that comes from social security benefits before you reach 66 or 67. This is especially true if your poor health means you can’t work as well as you used to or can’t work at all.

Unfortunately, if your health is very poor and it affects your lifespan, collecting your benefits early may even put you ahead financially over your lifetime.

But Remember Your Spouse

Before choosing to collect social security for your poor health, think about how it will affect your spouse as well. Remember that in addition to lowering your monthly benefits, it will lower your spouse’s survival benefits. This may not affect them, depending on other income and savings. However, it may also have a significant impact on their life and finances.

If You Don’t Think Social Security Will Last in Full

It is, unfortunately, no secret that the social security system has issues and may face some major changes in the future. If this really concerns you, you may want to start collecting early to ensure you get the money you are owed.

The important thing to keep in mind, however, is that while social security is likely to change for future generations, this isn’t likely to be a major concern for those currently approaching retirement. If there are changes that affect you, they will likely be minor. This would be more of a factor for your kids or grandkids.


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