Maximizing Your Social Security: When to Claim Benefits

Many individuals face the dilemma of when to start claiming their Social Security benefits. Should you claim early at age 62, wait until full retirement age (FRA) at 67, or delay until 70? This article breaks down the financial impact of each option using real calculations and analysis to help you make an informed decision.

Background

The amount of Social Security benefits you receive depends largely on the age at which you start claiming:

  • Pre-retirement Age (62): 0.7x (30% reduction of the full benefit)
  • Full Retirement Age (67): x (full benefit)
  • Delayed Retirement Age (70): 1.24x (24% increase of the full benefit)

Assuming the full monthly benefit at age 67 is x in the above, this gives us a basis for comparison.

A more detailed table showing the benefits from age 62 to 70 is as follows:

Age Percentage of Benefit Reduction from Full Retirement Age (%) Spouse’s Percentage of Benefit Spouse’s Reduction/Increase from Full Retirement Age (%)
62 70.00% -30.00% 32.50% -35.00%
63 75.00% -25.00% 37.50% -25.00%
64 80.00% -20.00% 41.70% -16.67%
65 86.67% -13.33% 45.80% -8.33%
66 93.33% -6.67% 48.30% -3.33%
67 100.00% 0.00% 50.00% 0.00%
68 108.00% +8.00% 50.00% 0.00%
69 116.00% +16.00% 50.00% 0.00%
70 124.00% +24.00% 50.00% 0.00%

Analysis: Claiming Benefits at 62 vs. 67

1. Claiming at 62

If you need the money early, taking benefits at 62 is a reasonable option. However, if you don’t urgently need it, you can consider the long-term implications in more detailed analysis.

2. Deciding Based on Health and Investment Opportunities

  • Health Considerations: If you expect your lifespan to be shorter than average (e.g., under 79 years), claiming at 62 could be beneficial.
    • By claiming at 62 and not using the money until 67, you will have accumulated 3.5x your full retirement benefit (over 5 years at 0.7x).
    • This 3.5x gives you a 12-year cushion to make up for the 30% reduction, as 3.5x/0.3x=123.5x/0.3x=12. After 12 years (i.e., by age 79), the full retirement benefit starts to outperform the early claim unless other factors like investment returns are considered.
    • Tax Implications: While federal income taxes reduce the savings slightly, the actual difference is minimal, as Social Security is tax-advantaged in many states. For example, after a 10% tax adjustment, the extra benefit would be about 3.15x instead of 3.5x.
  • Investment Considerations: If you invest the extra 3.5x benefit at 6% annually and withdraw 0.3x per year, it would take 27 years to deplete this fund instead of the 12 years as stated above. This means that the early claim at 62 only begins to lose out to the full retirement claim at age 94.
    • Investment Break-Even Ages: 62 vs. 67
      • Age 94: 6% annual return: The break-even age is 94 (67+27 years).
      • Age 89: 5% annual return: The break-even age is 89 (67+22 years).
      • Age 85: 4% annual return: The break-even age is 85 (67+18 years).
      • Age 83: 3% annual return: The break-even age is 83 (67+16 years).
      • Age 79: 0% annual return: The break-even age is 79 (67+12 years).

Never spend the benefit: what if you have enough other funds to cover your retirement expenses and don’t plan to use Social Security income at all, intending to leave it as part of your estate? Is it more beneficial to claim the benefit at age 62 and start investing, or should you wait until age 67 to receive the full benefit for investment purposes?

If Annual ReturnAgeClaim at 62 Compound ReturnClaim at 67 Compound Return
10%8775.3x63x
10%97208.69x180.94x
3%8726.29x27.68x
3%9743.59x49x

The table reveals that if you can achieve annualized returns greater than 3%, it’s more beneficial to claim Social Security at age 62. Otherwise, waiting until full retirement age (67) is the better option. This makes intuitive sense, as the Social Security Administration factors in certain assumed returns when determining the reduction for early benefits.

Claim at age 63, 64, 65, or 66? You might wonder how claiming at different ages would impact the break-even ages when considering various investment returns. For this, you can use our Social Security Benefit Age Calculator to analyze how different claim ages and potential investment returns affect your overall financial outcome.

Analysis: Claiming at 67 vs. 70

1. Delaying Until Age 70

By delaying benefits until age 70, you increase your monthly payout to 1.24x. However, you forgo three years of benefits from age 67 to 70, which could be used for other purposes or investments.

  • Investment Impact: If you claim benefits at 67 and invest the amount you receive over three years, this extra income 3x can help offset the additional 0.24x benefit you’d receive by waiting until age 70. Assuming a 6% annual return, it would take 24 years for the extra income to run out, resulting in a break-even age of 94.
    • Investment Break-Even Ages: 67 vs. 70
      • Age 98: 6% annual return: The break-even age is 98 (70+28 years).
      • Age 92: 5% annual return: The break-even age is 92 (70+22 years).
      • Age 89: 4% annual return: The break-even age is 89 (70+19 years).
      • Age 87: 3% annual return: The break-even age is 87 (70+17 years).
      • Age 82.5: 0% annual return: The break-even age is 82.5 (70+12.5 years).

In this case, a reasonable or safe 3% annual investment return would extend the break-even age to 87, compared to the early retirement claim at age 62, which would require an annual return of more than 4% to achieve a similar outcome.

Caveats

While the above calculators assume a constant annual return for simplicity, it’s essential to recognize that real-world returns fluctuate, especially for investments in higher-risk assets. A more stable annual return, typically ranging from 2% to 6% for bond investments, makes the conclusions more realistic and applicable for conservative investors. For those investing in more volatile assets, it’s important to adjust expectations accordingly, as the variability in returns can influence the overall benefit accumulation and break-even age. A more detailed explanation is as follow:

Accounting for Volatile Returns:

In scenarios with more volatile investments, such as stocks or mixed portfolios, annual returns can vary widely, potentially impacting the accumulation of benefits. In general:

  • Stable Assets (e.g., Bonds): Investments in more stable assets like fixed-income bonds tend to produce lower but more predictable returns. Typically, returns from bonds range between 2% and 6%. This makes the above analysis using constant returns more applicable and realistic for those considering conservative investment strategies.
    • Fixed-Income Bonds: Investments in government or corporate bonds offer more stability, and their returns tend to stay within a narrower band. The benefits of investing Social Security income in these assets would be more predictable, with less fluctuation in year-to-year returns.
    • Equity Investments: On the other hand, equity investments like stocks may offer higher average returns but also introduce significant volatility. The potential for negative returns in certain years may delay or entirely shift the break-even age, making it harder to predict the long-term benefits of early or delayed claims.

Implications for Break-Even Age:

  1. Low-Risk, Stable Returns (2% to 6%):
    • If you are investing in stable assets like bonds, the break-even calculations in the calculators (based on constant returns) are more accurate. Stable returns between 2% and 6% would keep your accumulation predictions more reliable over the long term, with fewer surprises.
  2. Higher Volatility in Returns:
    • If you opt for more volatile assets like stocks or equity-based portfolios, your yearly returns could fluctuate dramatically. In such cases, a few years of negative returns could significantly delay your break-even age. Likewise, years with high returns may allow you to accumulate more benefits sooner than expected.
  3. Consideration of Sequence Risk:
    • In volatile investments, the sequence of returns plays a critical role. If negative returns occur early on when you start investing your Social Security benefits, it can have a lasting impact on how much you can accumulate in the future, making your break-even age harder to predict. Conversely, strong early returns could accelerate accumulation.

Conclusions

With careful planning, you can maximize your Social Security benefits by investing any early claim income. Here’s the takeaway:

  • If you expect to live beyond the break-even points (age 79-88, depending on your investment return), claiming at full retirement age yields better overall benefits.
  • If you expect to live beyond the break-even points (age 82-94, depending on your investment return), delaying benefits until age 70 makes sense.
  • If you need funds earlier or believe your health may not last beyond 79, claiming at 62 is likely more advantageous.
  • Similarly, If you need funds earlier or believe your health may not last beyond 82.5, claiming at 67 is likely more advantageous than delaying to 70.
  • Strategic investments with early claims at 62 or 67 can significantly extend the benefits’ financial advantages, giving you more flexibility with your retirement funds. This is especially true if you can carefully invest the early benefits for better returns.

Ultimately, your health, financial situation, and investment strategy should guide your decision on when to claim Social Security.

Social Security Benefit Claim Age Calculator

See What are the best ages to claim benefits


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