“I am a few weeks shy of 62. Should I take my Social Security benefit at a reduced rate or wait?” — Pauline W.
The optimal time to file for your Social Security benefits will be different for everyone. To make the best decision for you, make sure you understand how the early filing penalty and delayed filing credits impact the value of your benefit.
Age: 62
This is the earliest you can file for benefits. While it may be tempting to take the money as soon as possible, doing so comes at a pretty steep price. As you point out, your benefits are reduced for filing before normal retirement age.
Pro: You Need Money Now
Consider the impact that difference might make for you over the long term. It’s not the only thing to think about, but your personal life expectancy is certainly a major factor. If you have genuine reason to believe you may not live long, then filing early may be a better option. Also, if you plain and simple need the money now and don’t really have good alternatives like working a little longer, then filing now may be your best (or only) choice.
Con: Early Filing Penalty
The formula to determine the early filing penalty is 5/9 of one percent for each month before your normal retirement age up to 36 months. Every early month beyond those first 36 reduces your benefit by 5/12 of one percent. That probably seems clunky. I’ll follow with an example.
Each person’s full retirement age depends on the year they were born. It sounds like you were born in 1960 or later, so your full retirement age is 67. To make it easy, let’s say you file exactly 5 years early. Your penalty is 30% — 5/9 of 1% x 36 = 20%, and 5/12 of 1% x 24 = 10%.
To see this in dollar amounts, let’s assume you’d qualify for $2,000 at 67. With a 30% reduction at 62, you would get $1,400. That’s a pretty big difference considering this is a lifetime benefit. The tradeoff, of course, is that you’d get that $1,400 per month starting now.
Age: 67
Pro: Full Retirement Benefit
Filing at your full retirement age (also called normal retirement age) means you get your full benefit. There’s no reduction. If your full retirement age benefit is enough to provide the financial support you need, then this may be an acceptable age to file.
Con: Working Longer
If you do wait until you are 67 years old, it could mean working for another 5 years. For some, that may not be worth sacrificing the freedom of retirement, even if it means paying a high penalty for early withdrawal.
Age: 70
Pro: Increased Benefit
Delaying past your full retirement age means an increased benefit. Delayed filing credits boost your benefit by 8% per year, up until you reach 70. For you, that means you may be able to increase your benefit by a total of 24% by waiting.
Going back to the assumption that you would receive $2,000 at 67, you’d be able to draw $2,480 at 70.
Con: Working Longer
So what is the drawback to waiting until age 70? Well, if you compare it to your option of withdrawing at 62, then that means you wait a full 8 more years before you receive anything. Some people have a hard time accepting an 8-year delay. If you die before reaching 70 then you would have missed out on all those foregone payments. It also means you either have to work longer or withdraw more from your savings until Social Security benefits begin.
That said, if you live long enough then the boost from the delayed credits means you’ll eventually withdraw more dollars by delaying than you would have collected by filing early and receiving more (but smaller) payments.
At Which Age Should I File?
This is a more complex question than simply trying to estimate your lifespan and filing at the age that you believe will result in more dollars over your remaining years.
If you truly need the money now then your decision is simple. However, if you can delay, in most cases you will be better off. Social Security benefits provide more than just the dollar value of your benefits. Consider that your Social Security:
- Is only up to 85% taxable
- Is not subject to stock market volatility
- Provides protection from inflation
- Is guaranteed
These aspects make Social Security a valuable component of most people’s incomes in retirement. Maximizing your Social Security benefit by waiting also means maximizing these characteristics.
Crunching numbers? Learn more about Social Security and financial planning for and in retirement from Brandon and our other experts.