Deciding when to start taking Social Security benefits is one of the most important financial choices you’ll make in your later years. Claiming them at just the right time could stretch your retirement dollars further, ensuring your savings last the rest of your life, but claiming them too early can have long-lasting financial consequences that could make your retired life much harder than it has to be.
Plus, while many people may know that claiming Social Security at age 62 reduces your benefits by 30% over the course of your life, they’re not as keyed into the cumulative impact of reduced benefits. This article explores two key considerations you might want to weigh carefully before deciding when to apply.
Claiming at 62 automatically lowers your benefits check
First, let’s cover the permanent benefits reduction that many people are already familiar with. While workers are able to apply for their Social Security benefits as soon as they turn 62, their benefits are reduced by a certain percentage for every month during which they claim benefits prior to their full retirement age (FRA).
This benefits reduction is permanent, and it can sting: claiming benefits 60 months before your FRA lowers your check by a full 30%. If you were scheduled to receive the current monthly average of $2,082.76, that means you’d lose around $624.83 of that total every single month for the rest of your life. Instead, your benefit check would be $1,457.93.
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1. COLA percentages could knock your benefit down further
But the best-known consequence of claiming Social Security at 62 isn’t the only one, and it might not even be the worst. The cumulative problems caused by claiming early benefits could have at least as dire of an impact on your finances.
Most years, the Social Security Administration (SSA) makes a cost-of-living adjustment (COLA) to Social Security payments to help retirees cope with inflation. However, the COLA is a flat percentage that applies equally to all beneficiaries no matter when they claimed benefits, so beneficiaries with a higher check end up naturally benefiting more from the year’s COLA.
For instance, a 2.8% COLA on the average benefit amount of $2,082.76 adds $58.32 to each beneficiary’s check. But a 2.8% COLA on a benefit reduced to $1,457.93 adds just $40.82. The $17.50 difference might not seem like much, but the difference widens year after year, further degrading your purchasing power over time.
2. Inflation might force you to deplete retirement savings faster
In contrast to retirement accounts like a 401(k) or IRA, a Social Security check is one source of income you know you won’t lose. However, a smaller check means your dollar won’t go as far during periods of high inflation. To compensate, you might have to withdraw more from your retirement accounts than you’d planned on, and selling stocks when the economy is struggling might mean you net a lower profit. Your retirement funds could dry up faster than you’d planned depending on how much you use them to compensate for your lower benefit.
When to consider applying at 62 anyway
Of course, there are plenty of legitimate reasons to apply at 62 and simply eat the cost of reduced benefits. If your family doesn’t have a history of longevity or you have a shorter-than-expected lifespan, delaying taking benefits until age 70 might just mean you don’t have as much time to enjoy them. And if you are unable to work, applying at age 62 might be the only way to stay afloat, making the potential long-term losses a moot point.
When applying at 62 makes less sense
On the flip side, if your immediate family members all lived long lives, you’re currently in good health and expect to remain that way, or you’re planning to continue working until at least your late 60s, delaying benefits until you’re 70 could be a good way to maximize the amount you qualify for.
Bottom line
It’s tempting to see pre-FRA Social Security benefits as a numbers problem only, but calculating your benefits reduction by the dollar amount you lose may only tell part of the story. Dynamic market conditions and a seemingly unpredictable future might throw your retirement goals into disarray, worsening the overall financial impact of claiming benefits too early.
But finances aren’t the only element of retirement to consider. The emotional impact of worrying about running out of funds early might be enough of a reason for some claimants to put off taking benefits for at least another year. Remember, every month closer to your FRA preserves a little more of your monthly benefit, so waiting even a few months could make an important impact on your future emotional and financial health.
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Author Details
Chris Lewis, CEPF
Chris Lewis has spent his career turning data into answers. As the Head of Research at FinanceBuzz and a Certified Educator in Personal Finance, he oversees the data journalism and media relations teams, digging into the personal finance topics that shape Americans’ lives at every stage, from Social Security and retirement income to 401(k) strategies, jobs, and real estate.
