Social security benefits are a key part of any retirement plan. But deciding when to claim those benefits is something all retirees should think long and hard about.
Deciding when to tap into your social security is a highly personalized decision. You paid money into the system during your working years, that money has compounded and grown. Now it’s time for you to reap the benefits. But taking it sooner, rather than later, can cost you over the course of retirement.
Some of the reasons we’ve heard for claiming your benefit as soon as you retire are:
“Well it’s my money, and I don’t know how long I’m going to be around for, so I should take it while I can.”
“I don’t trust the government, and think Social Security is going to run out of money down the road. Better get it while I can.”
“I can’t stand working anymore, I can just live off Social Security.”
If you retire at age 62, we have to plan for the possibility that your retirement could last up to 40 years. That’s almost as long as you worked!
A person born in 1960 will reach age 62 this year in 2022. If they decide to retire, they will be eligible to claim their benefit. But this person’s full retirement age for social security purposes isn’t until they turn age 67.
Full retirement age is either 66 or 67, depending on when you were born. Think of full retirement age as neutral. If you collect your benefit at full retirement age, your benefit is neither increased, nor decreased.
If you claim before full retirement age, your benefit is decreased.
If you claim after full retirement age, your benefit is increased.
Now let’s do some math to further illustrate this.
The Benefits of Delaying Social Security
A $1,000 monthly benefit taken at age 62, instead of 67 (full retirement age), would be reduced to $700 a month, a 30% decrease.
If you waited until after full retirement age and claimed your benefit at age 70 instead, your monthly check would be about $1,260.
If you are born in 1943 or later, each year you delay past your full retirement age increases your benefit by 8% per year. A pretty nice return for waiting just a couple of years. These benefits only increase until age 70.
The main argument for taking social security early is that you’ll be receiving the checks for a longer period of time. Which is true. But let’s continue our example to see if the dollars and cents actually work out.
If this person passes away at the age of 90, would they have been better off taking $700 per month starting at age 62 or $1,260 per month starting at age 70?
$700 a month is $8,400 per year. $8,400 per year for 28 years is $235,200.
$1,260 a month is $15,120 per year. $15,120 per year for 20 years is $302,400.
Choosing to collect social security starting at age 62 instead of 70 would cost this person $67,200 over the course of their retirement.
The average monthly benefit in New Jersey in 2021 was $1,689 so the numbers will differ but the thought process remains the same.
It’s also important to note that if you claim early, your monthly benefit does not increase once you hit full retirement age at 67.
Your benefit will be permanently reduced for as long as you receive it .
Claiming social security early reduces the spousal benefit as well.
The spousal benefit, if claimed at age 62 is between 32.5% – 35% of your spouse’s benefit. If your spouse waits until full retirement age, the spousal benefit will be 50% of your spouse’s benefit.
50% is the spousal benefit max and it does not increase if you delay past full retirement age.
With all this being said, we understand that decisions aren’t strictly about dollars and cents. The early years of retirement are often when people are their healthiest. So if that $700 per month allows you to enjoy your life and have some really fun experiences, great! Good decision.
There is no one size fits all approach.
If you don’t know where to even begin, head over to ssa.gov and check out their quick calculator tool to find out how much you stand to collect. That should get the ball rolling.
We want our clients to have both eyes wide open when making important retirement decisions like this one. It’s our job to present the dollars and cents side of the equation and work together to come to the right decision for THEM.