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 most people would benefit from waiting until, say, age 67 to take payments, others could risk running out of money too soon and might have fewer options.
The Costs of Taking Social Security Early
For starters, you'll forfeit future increases in your monthly income if you take Social Security early. Claiming at age 62 reduces your benefit approximately 25% below the amount you are eligible for at full retirement age—66 or 67, depending on the year you were born. Plus, your potential annual cost-of-living adjustment (COLA) is based on your benefit. If you begin Social Security at age 62, your COLA will be lower too.
If you plan to claim benefits based on your spouse's work record, you'll lose even more by taking benefits before you are at full retirement age. The benefit reduction is greater for a spouse—35% instead of 30%. For instance, if you're the spouse of the person in the above example, you'd be eligible for only $520 a month at age 62, which is 35% less than the $800 a month you would get at your full retirement age.1
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: The average yearly cost of health insurance for individuals age 55-64 was $10,137 (including $1,310 in out-of-pocket spending in 2016). Why cut your benefits permanently just to pay for health insurance?2
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 2020, you can contribute up to $19,500 to each plan if you are under age 50. But if you are over 50, you can contribute up to $26,000 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.