If you’re eligible, you can start collecting your retirement benefit from Social Security as early as age 62. The key trade-off you face in choosing to start that early is that you will receive benefits for more months, but each payment will be permanently reduced versus waiting until later to start collecting. That trade-off makes age 62 both the worst — and the best — age to claim Social Security.
How can that be? On average, people will receive about the same from Social Security throughout their lifetime, regardless of when they start collecting. Early collectors get lower benefits for longer, while late collectors get higher benefits for a shorter time. That fact, combined with the rest of your financial picture, add up to make your 62nd birthday either an ideal day to start collecting or a terrible one.
Why 62 can be the worst age to claim
Although 62 is the most popular age to start receiving Social Security, there are a lot of reasons not to if at all possible. First, there’s a substantial penalty if you’re still working and collecting benefits at 62: $1 in benefits for every $2 in salary you earn above $19,500 a year. That penalty makes it darn near impossible to go back to work if you start collecting early, as it’s a huge disincentive for collecting a paycheck if you’re also collecting Social Security.
Second, Social Security benefits are inflation-adjusted every year. The program applies that inflation adjustment to whatever your existing benefit amount is. If you’re dealing with a reduced check because you collected early, it’s that much less of your total income that will receive that inflation adjustment every year. That exposes more of your potential expenses to inflation, forcing the rest of your money to work harder just to keep pace.
Third, many people who collect at 62 do so because they are no longer working and don’t have enough saved up to make it to a later date before they start collecting. If you’re claiming early because you have to, it more or less locks your lifestyle at that reduced Social Security income level for the rest of your life. While the typical Social Security benefit is enough to keep people above the national poverty level, it doesn’t generally offer all that much above that basic income.
Why 62 can be the best age to claim
Despite those challenges, 62 could instead turn out to be the best age to collect Social Security benefits. One key reason is that people’s spending (other than on healthcare) tends to decline the deeper into retirement they get. By taking your benefits earlier, you’ll be more likely to have the money available while you’re still willing and able to make good use of it.
In addition, if you’ve been a good saver throughout your working life, taking your benefits early can let you keep more of your money working for you for a longer period of time. This is because you still need money to cover your bills, and money you need to spend in the next five years or so does not belong in stocks. As much as you can use your Social Security payment to help cover your bills, it means that much less you need to take out of your more-aggressive investments with higher potential returns.
On a related note, once you reach age 72, you’re required to take withdrawals from 401(k)s and traditional IRAs. Those required minimum distributions (RMDs) can add to your tax burden, raise your Medicare costs, and make more of your Social Security taxable, just from moving money from one of your pockets to the other.
One approach to reduce the burden of those RMDs is to convert the money in those plans into a Roth IRA. By making partial conversions in low-income years before you reach age 72, you can reduce the size of your RMDs and better keep the subsequent tax and cost burdens in check.
Those conversions are most efficient if you can cover the taxes they create from a source other than your retirement account itself. Taking Social Security at 62 in order to have some extra cash to cover those conversion taxes can be a great way to protect more of your nest egg for longer.
It’s really about having a plan
If you have a decent plan in place and a nest egg you want to manage for the long term, taking Social Security at 62 can play a great part in your plan. If, on the other hand, you’re expecting to rely on Social Security to be your sole source of retirement income, then taking it at 62 can trap you into a fairly low-income situation for the long haul.
The key difference is the end-to-end retirement plan you have in place before you decide to collect. The earlier you get started building that plan, the better your chances of being able to fall on the side of 62 being a great age to begin your benefits. So get started building your plan today, and put yourself in a stronger spot to take Social Security when it makes more sense for you.
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