When to Collect Social Security: The Case for Starting Early

When to begin collecting Social Security benefits may seem like a simple question, but the best answer from a lifetime financial perspective is often deceptively complex.

The normal Social Security retirement age is generally between 66 and 67, depending on the year you were born. But you can start collecting benefits at any age from 62 to 70.  If you take them early, you’ll get less each month.  If you delay taking benefits, you’ll get more.  The question for each of us, then, is:  at what age should I start?

In the current era of low interest rates, it often makes very good financial sense to delay taking benefits as long as possible, until age 70.  I’ll make that case in my next blog post.  In the meantime, though, there are also times when starting your benefits early is necessary or even desirable.  Let’s take a look at five of those situations.

Early, on Time, or Later?  Understanding the Basics

When it comes to collecting Social Security benefits, most people are early birds. According to the Center for Retirement Research at Boston College, in 2013:

• 48 percent of women and 42 percent of men claimed benefits as early as possible, at age 62.
  
  
• 27 percent of women and 34 percent of men waited until their Full Retirement Age (FRA), which is 66 if you were born between 1943 and 1954.  (It gradually increases to 67 for those born in 1960 or later.)
  
  
• Just 4 percent of women and 2 percent of men waited until age 70, the age at which the monthly benefit stops increasing even if you continue to delay taking benefits. 

The price of collecting benefits early is that your monthly payment is permanently reduced compared with collecting at your FRA or later.  Specifically, benefits are reduced by 6.67% a year for the first three years they’re claimed early, and by 5% for years after that.

At full retirement age, you receive what’s known as your Primary Insurance Amount (PIA), the monthly payment that the Social Security Administration calculates based on the highest 35 years of your earnings history.  (Past earnings are adjusted, or indexed, to make them comparable to current earnings.)

If you delay taking benefits, they increase by 8 percent of your PIA each year, until age 70.

Example:  Sheila’s monthly benefit (primary insurance amount) would be $1,500 at her full retirement age of 66.  At age 62, her benefit would be only $1,125, or 25 percent less.  On the other hand, if Sheila delays collecting benefits until age 70, her monthly benefit would be $1,980—32 percent more than she would get at 66, and a whopping 76 percent more than at 62.

Of course, if Sheila begins her benefits at 62, she’ll collect four more years of benefits than she would at  66, hence the reduction in the monthly payment.  In the example above, Sheila would collect $13,500 per year, or $54,000 over the four years from 62 to 66.

Conversely, if Sheila waits until 70 to start her benefits, she’ll collect fewer payments over her lifetime, so the monthly payments are correspondingly higher.

Few of Us Are Average

Mathematically, it all works out pretty much the same whenever you begin collecting benefits, because your lifetime benefits, on average, are designed to be about the same whenever you start to collect. 

The key word there, however, is average.  Social Security bases its benefits on average life expectancy for the population as a whole.  Most people, though, will live either longer or shorter than the average. 

Therefore, the total amount you collect, and thus the ideal age to begin collecting benefits, can vary dramatically with your individual circumstances.

5 Reasons to Consider Collecting Benefits Early

1. You need the money now.  Sometimes you simply don’t have the luxury of choosing whether to delay benefits.  If you’ve been laid off or otherwise forced into early retirement by health or other circumstances, Social Security can be a lifeline. In fact, although it was designed only to supplement other retirement benefits and savings, Social Security constitutes the lion’s share of income for nearly two out of three people 65 and older.  
   
   
2. You’re in poor health, or otherwise have reason to believe that you may not reach the average life expectancy.  According to Social Security, a 62-year-old man can expect to live about 20 more years, to age 82, on average, while the average 62-year-old woman will reach nearly 85.
   
   If you hold off on collecting benefits from age 62 until age 66, you’ll need to wait nearly 16 years—about age 78—to break even in terms of total benefits collected. After 78, you’re better off having waited.
   
   The breakeven point for waiting until age 70 is even longer, about 18½ years, or age 80½. If you don’t think you’ll live that long, you may not want to wait.
   
   
3. You don’t have to worry about the earnings test.  If you collect Social Security early and also have earned income such as wages, your benefits will be reduced by $1 for every $2 that your earnings exceed $16,920 in 2017. (The limit is adjusted annually.)  That could make claiming benefits early counterproductive if you’re counting on the income.  However, if you’re not working, or your earnings don’t exceed the limit, there’s no loss of benefits when you claim early.
   
   A higher earnings limit of $44,880 (in 2017) and a smaller reduction factor—$1 for every $3 over the limit—apply for the year in which you reach full retirement age. Note:  Once you attain your full retirement age, there’s no limit on earnings.
   
   
4. You aren’t married.  One of the most powerful arguments in favor of delaying benefits is that, for a married couple, the surviving spouse receives the higher of their own or their deceased spouse’s benefit.  Only one Social Security check remains, though.  Thus, the higher-earning spouse is often advised to delay claiming benefits because the increased benefit amount will be paid as long as either spouse is alive.   Delaying, in other words, protects the surviving spouse by providing him or her with the highest possible income.  If you’re single, divorced, or widowed, however, you don’t need to worry about the effect on a surviving spouse of claiming reduced benefits early.
   
   
5. You can claim early and invest the money at a better rate.  In the example discussed above, if Sheila waits to age 63 instead of collecting benefits at 62, she would receive $1,200 per month instead of $1,125, which is 6.67% more.  That extra $900 per year ($75 a month) is essentially a lifetime annuity, and it’s adjusted every year for inflation.
   
   On the other hand, Sheila might take the money at 62 and invest the $13,500 ($1,125 X 12) in stocks or some other security, hoping to earn a rate of return better than 6.67% (plus the inflation rate) over her lifetime.  Such a strategy could be both risky and difficult to achieve in today’s environment of high stock valuations and low interest rates, but it could well pay off in a different investment climate. 

In short, while it often makes good economic sense to delay collecting Social Security benefits as long as possible, there are times when collecting them early may provide the best outcome.  The decision should be evaluated based on each person’s unique personal and financial circumstances.