The Dangers of Claiming Early: A Warning for Your Retirement Savings

The decision of when to claim Social Security benefits involves a trade-off between receiving smaller monthly payments immediately or larger payments later, according to CNN. While claiming at age 62 provides immediate cash flow, waiting until full retirement age or age 70 increases the permanent monthly benefit amount.

CNN“Figuring out the best age to claim your benefits isn’t always straightforward.”

Why does the claiming age affect monthly payments?

The Social Security Administration (SSA) adjusts monthly payouts based on the age a worker begins collecting benefits. Workers can start as early as age 62, but doing so results in a permanent reduction in the monthly check. According to SSA guidelines, those who claim at 62 may see their benefits reduced by up to 30% compared to their amount at full retirement age.

Full retirement age (FRA) varies by birth year, typically falling between 66 and 67. Workers who wait until their FRA receive 100% of their primary insurance amount. For those who delay benefits beyond their FRA, the SSA provides delayed retirement credits. These credits increase the monthly payment by approximately 8% for every year the worker waits, up to age 70.

How does the break-even point work?

Choosing between early and delayed benefits creates a “break-even” scenario. This is the point in time when the total cumulative money received from larger, delayed checks surpasses the total sum of the smaller checks received by someone who started at 62.

CNN reports that choosing to wait means it will take several years to break even. A worker who claims at 62 has a head start of several years of income. A worker who waits until 70 receives a much larger check, but they must collect those larger payments for a specific number of years to make up for the missed payments between 62 and 70.

The break-even point usually occurs in the late 70s or early 80s. If a worker lives past this point, waiting for the higher payment results in more total lifetime wealth. If a worker dies before reaching the break-even age, claiming early provided more total value.

What are the alternatives to immediate spending?

Some workers choose to claim benefits early not because they need the cash for living expenses, but to utilize the funds for other financial goals. CNN suggests that workers who can afford to do so might stash the early payments away or invest them.

Investing early Social Security payments allows a worker to potentially grow their capital in the market. This strategy attempts to offset the lower monthly payment provided by the SSA. The success of this approach depends on the rate of return on the investments compared to the guaranteed increase provided by the SSA for delaying benefits.

Which factors influence the decision?

Financial advisors generally point to three primary factors when determining the optimal claiming age:

The SSA does not provide a one-size-fits-all age for claiming. The decision rests on a worker’s specific health profile, current assets, and projected longevity.