Taking Social Security as soon as you're eligible—generally, age 62—is tempting. After all, you've likely been paying taxes into the system for your entire working life, and you're ready to receive your benefits. Plus, you will get a boost from the guaranteed monthly income.
But claiming your retirement benefit early can be a pretty costly decision.
Taking Social Security as soon as you're eligible is tempting, but there's a trade-off.
There are costs associated with the rules of the program and other factors to consider, so it’s important to understand fully the effect your decision will have on your overall retirement income.
If you can afford it, waiting is often the better option. Ideally, you want to evaluate your decision on when to take Social Security based on how much you've saved for retirement and your other sources of income.
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.
Delaying can boost monthly payments.
Monthly Social Security benefit at age 62
Monthly Social Security benefit at age 65
Monthly Social Security benefit at age 70
This hypothetical example, which assumes an individual turning 62 in 2022, is calculated by the Fidelity Financial Solutions Team based on data and methodology published by the Social Security Administration as of March 2021. All benefits are calculated in today's dollars and before tax. The actual benefit would be adjusted for inflation and might be subject to income tax. Lifetime benefits are based on life expectancy of 89. The lifetime number is sensitive to, and would change with, the life expectancy assumption.
The Costs of Taking Social Security Early
If you start taking Social Security at age 62, rather than waiting until your full retirement age, you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach full retirement age. Remember, full retirement age is no longer age 65: It now ranges from 66 to 67, depending on your date of birth.
Plus, 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.
Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay your claim past your full retirement age, 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 be 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.
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 full retirement age on a spouse's record means you'll lose even more than claiming on your own record—the benefit reduction for a spouse is up to 35%, while the reduction for claiming your own benefit is up to 30%.
Your decision to take benefits early will live on even if you don't. If you die, your spouse is eligible to receive your monthly amount as a survivor benefit (if it's higher than his or her own amount). But if you take your benefits early, those payments will be less than they could have been for the remainder of your spouse’s lifetime
Broader Costs to Your Retirement Savings
It's natural to want to retire as soon as you can, but it's crucial to consider the earning and investing power you may give up if you stop working full-time to take Social Security at age 62. Most obviously, if you leave a job with good pay and benefits, it may be difficult to ever regain that level of compensation if you decide to return to work later.
And while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65. So, in the meantime, you will probably have to pay for private health insurance (including UC-sponsored coverage, if eligible). That can eat up a large chunk of your Social Security payments. Why cut your benefits permanently just to pay for health insurance?
But there's even more to the story.
- As you approach retirement, you're often at the peak of your earnings, and of your ability to build retirement savings. Keep working, and you can make "catch-up" contributions to tax-deferred workplace savings plans. Catch-up contributions allow you to set aside larger amounts of money for retirement. For example, In 2022, you can contribute up to $20,500 to each plan if you are under age 50. But if you are over 50, you can contribute up to $27,000 to each plan. Note: These amounts are subject to COLAs.
- Moreover, if you stay on the job past age 62, your Social Security retirement benefits will increase each year, up to age 70. Delaying retirement for even a few years can substantially increase the size of your retirement savings and at the same time increase your Social Security income. Both of these factors combine to increase the chances for a successful retirement plan. Conversely, if you stop working at 62, you will stop tax-advantaged saving opportunities and cap your Social Security benefits—and you may begin to draw down your savings earlier.
When cash is available, it's always alluring to take the money and run. But when it comes to Social Security, this can indeed be a very costly decision. Draw benefits as soon as you can, and you will permanently reduce payments to you and your spouse and lose the chance to keep saving and planning as advantageously as possible. It's often better to wait, and to tap other savings if you need to. Then Social Security can fund the largest possible portion of your retirement for the rest of your life.