When Social Security Early Retirement Makes Sense

According to financial experts, many American workers ask when Social Security early retirement makes sense. After all, most people work hard for decades and long for free time to enjoy life. According to the U.S. Bureau of Labor Statistics (“Trends in Retirement Age by Sex” 1950 to 2005), more people are retiring before age 65 than ever before.

Unfortunately for those who want to claim Social Security early retirement benefits at age 62 or before Social Security Full Retirement Age (FRA), Social Security Administration (SSA) pays beneficiaries to wait. In fact, the longer the beneficiary waits (up to age 70) to claim Social Security retirement benefits, the higher his or her monthly retirement benefit will be. Since people are living longer and enjoying more retirement years than their grandparents, it’s important to avoid outliving retirement savings.

Let’s take a look at how to match Social Security retirement benefits and the beneficiary’s retirement income needs.

Living Longer in Retirement

The Centers for Disease Control & Prevention (CDC) reports that the average American can expect to live about 78 years. Life expectancy has continued to climb each year since 1900, and it’s higher by about seven years over the past 37 years.

Benefits experts theorize that longer life expectancies are probably the reason that fewer employers offer defined-benefit plans today. It’s up to future retirees to plan for the future by contributing to defined-contribution plans like employer-offered 401(k) plans. Fewer retirees today can count on a guaranteed pension income stream.

Social Security Full Retirement Age

According to the original Social Security Act in force in 1935, beneficiaries could claim Social Security retirement benefits at age 65. In recent years, Congress reviewed the impact of better health care and longevity. Older people live longer than original Social Security beneficiaries did in the 1930s.

In 1983, Congress amended Social Security to increase full retirement age from the former 65 to 67 (individuals born in 1960 or later):

  • Beneficiaries were provided with a Social Security early retirement option at age 62—at a price. Claiming early retirement benefits requires the Social Security beneficiary to receive lower benefits for life.
  • In comparison, if the beneficiary waits to reach FRA, or delays claiming Social Security retirement benefits until age 70, Social Security increases the individual’s benefit to the maximum. This year, the maximum Social Security monthly retirement benefit is USD 2,639. To estimate Social Security benefits, visit the Quick Calculator at SSA.gov.

SSA isn’t likely to subsidize early retirement dreams in future years. Social Security faces an array of solvency-challenging issues over the next 16 to 18 years. Delayed claim of Social Security retirement benefits helps SSA conserve cash on hand and provides more monthly income to those who are willing to wait.

Social Security Early Retirement Breakeven

In order to calculate the breakeven between taking early retirement, full retirement, or delayed retirement, it’s important to consider the beneficiary’s life expectancy:

  • If the Social Security beneficiary is deliberating about taking early retirement or waiting until FRA, he or she should consider the likelihood of living to age 78.
  • Social Security actuaries predict that if the beneficiary lives to age 78 plus one month, he or she should wait to FRA to claim retirement benefits.
  • In order to derive maximum benefit of delaying retirement benefits to age 70, the beneficiary must surpass 79 years plus nine months.

Social Security says that Americans who opt for early retirement usually do so out of necessity:

  • Claiming early retirement benefits isn’t a choice. The beneficiary hasn’t saved other funds for retirement.
  • The beneficiary has a chronic or serious illness, and has reasons to assume a shorter than average life expectancy.
  • Optimistic early retirees believe that time is money. They want the option to invest in an idea, enterprise, or just want more time with family and friends. They’re willing to pay by accepting lower Social Security retirement benefits.
  • Pessimistic early retirees believe the present is as good a time as any to claim Social Security benefits. They’ve paid Social Security tax for years and believe SSA’s eventually bankruptcy is certain.

Delaying Social Security Retirement Benefits

In addition to receiving a much higher monthly retirement benefit at FRA or up to age 70, Social Security beneficiaries should consider two additional points:

  • Survivor’s benefits are calculated on the original Social Security retirement benefit. This means if the survivor spouse is likely to live to old age, taking early retirement could eventually affect his or her finances for years to come.
  • It’s important to consider the impact of taxes on Social Security retirement income. To know whether Social Security benefits are taxable, divide total estimated Social Security retirement income and add all other income (including tax-free municipal bond income or other exempt dividends and interest). If the beneficiary is married and files a joint tax return with his or her spouse, their Social Security retirement benefits and other income must be combined.
  • With taxes in mind, consider the impact state taxation on Social Security benefits. Thirteen states currently tax Social Security retirement benefits, including West Virginia, Connecticut, North Dakota, Nebraska, Kansas, New Mexico, Rhode Island, Minnesota, Vermont, Missouri, Utah, and Montana.

Making the decision about when to claim Social Security retirement benefits is complex. For some individuals, locking in a certain monthly payment is the primary reason to claim Social Security retirement benefits. Before claiming early retirement benefits from Social Security, consider health status, current income, taxation, future income, and projected survivor’s financial needs.

The decision about when Social Security early retirement makes sense is an individual choice. Social Security retirement benefits were never intended to pay for all of life’s needs and wants in retirement. It’s up to each American worker to decide how he or she will live in retirement by taking full advantage of tax-favored investment plans now.