By W Financial Advisors • Wealth Wednesday Brief • 3–5 min read
SCENARIO
"I want to get my money before they change the rules," Paul said. He was 61, in good health, and had already decided to claim Social Security the month he turned 62.
His advisor had heard this reasoning before. The concern about future benefit cuts is understandable, and not entirely without basis. But for most people, the decision to claim at 62 carries a cost that outlasts whatever uncertainty it was meant to avoid: a permanent reduction to every Social Security check for the rest of their life.
For Paul, who had a family history of longevity and a spouse ten years younger, this was a decision worth examining very carefully.
THE CONCEPT
Social Security retirement benefits are designed around a concept called Full Retirement Age (FRA), which is the age at which you receive your full, unreduced benefit. For anyone born in 1960 or later, FRA is 67. For those born between 1943 and 1954, it was 66. (Check ssa.gov for your specific FRA based on your birth year.)
You can claim as early as age 62, but every month you claim before your FRA results in a reduction. The reduction is approximately 0.56% per month for the first 36 months before FRA, and 0.42% per month beyond that. For someone with an FRA of 67, claiming at 62 results in a permanent 30% reduction in monthly benefits.
On the other side, delaying past FRA earns delayed retirement credits of 8% per year, up to age 70. Someone with an FRA of 67 who waits until 70 receives a benefit that is 24% higher than their FRA amount, and approximately 77% higher than if they had claimed at 62.
These adjustments are permanent. They apply to every check for the rest of your life, including any survivor benefit your spouse may eventually receive.
EXAMPLE
Let's use round numbers to illustrate. Suppose Jennifer's full retirement benefit at age 67 is $2,500 per month.
If she claims at 62: $1,750/month (30% reduction), If she claims at 67: $2,500/month (full benefit) If she claims at 70: $3,100/month (24% increase for delayed credits)
Now factor in a 25-year retirement from age 67 to 92:
- Claiming at 62 (30 years of payments): $1,750 × 360 months = $630,000
- Claiming at 67 (25 years of payments): $2,500 × 300 months = $750,000
- Claiming at 70 (22 years of payments): $3,100 × 264 months = $818,400
This simplified comparison doesn't account for taxes, investment returns on foregone benefits, inflation adjustments, or spousal considerations, all of which are important and should be modeled in a comprehensive analysis. But the directional message is clear: for someone who lives a long life, the higher benefit from delaying may add up to a meaningful sum.
STRATEGY
Rather than defaulting to early claiming, consider evaluating these factors:
- Health and family history. If you're in good health and have a family history of longevity, the mathematical case for delaying is stronger. If you have significant health concerns, earlier claiming may be appropriate.
- Other income sources. Can you bridge the gap between retirement and a later claiming age using portfolio assets, a pension, or part-time work? If so, delaying may be more feasible than it first appears.
- Spousal coordination. For married couples, the higher earner's claiming age is especially significant because the surviving spouse will receive the higher of the two benefits. Maximizing the higher earner's benefit may provide meaningful financial protection for the survivor.
- Break-even analysis. Your advisor can model the age at which a higher delayed benefit overcomes the years of foregone income. This break-even point is typically in the late 70s and should be weighed against your realistic life expectancy.
COMMON MISTAKE
The most common mistake is treating Social Security as a resource to be tapped as soon as possible, without modeling what the long-term reduction costs.
A subtler mistake is focusing only on the break-even analysis and ignoring the survivor benefit implications. For married couples, the primary breadwinner's claiming decision is often the single most important Social Security choice, because the survivor will receive that benefit for the rest of their life. A permanently reduced benefit can have decades of financial consequences for a surviving spouse.
KEY TAKEAWAY
Claiming Social Security early may feel like getting your money sooner, but the permanent reduction that comes with early claiming can cost significantly more over a long retirement. A careful analysis of your health, income, and family situation is worth doing before you decide.
SOURCES & REFERENCES
1. Social Security Administration. Retirement Benefits. Publication No. 05-10035. ssa.gov.
This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or financial advice. All examples are hypothetical and for illustrative purposes only. Actual Social Security benefits and claiming outcomes will vary based on individual circumstances. Please consult a qualified financial, tax, or legal professional regarding your specific situation.
Every situation is different. If you would like to think through how this applies to your plan, we are here to help.
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