Are You Leaving Money on the Table by Claiming Social Security Too Soon?

For many people approaching retirement, Social Security is a key source of income in their golden years. However, the decision of when to start claiming Social Security benefits is often more complicated than it seems. While it’s tempting to start claiming as soon as you become eligible at age 62, you might be leaving a significant amount of money on the table if you do. In this post, we’ll explore why waiting to claim your Social Security benefits might be one of the smartest financial decisions you can make—and how claiming too soon could cost you in the long run.

1. The Basics of Social Security Timing

First, let’s review the rules of claiming Social Security. You can begin receiving benefits as early as age 62, but the amount you get each month will be reduced compared to what you would receive if you wait until your “full retirement age” (FRA). FRA varies depending on your birth year, but for most people, it’s around 66 or 67.

If you decide to delay your benefits past your FRA, you can earn “delayed retirement credits” that increase your monthly benefit by about 8% per year until you reach age 70. After age 70, there’s no additional financial benefit to delaying any further, so it’s typically not worth waiting longer.

In short:

• Age 62: Early retirement, with reduced benefits.
• Full Retirement Age (FRA): No reduction in benefits.
• Age 70: Maximum monthly benefit due to delayed retirement credits.

2. How Claiming Early Affects Your Monthly Benefit

Claiming Social Security benefits before your FRA results in a permanent reduction in the amount you receive. For example, if your FRA is 67, and you choose to start claiming at 62, your benefit could be reduced by as much as 30%. That means if you’re entitled to $2,000 per month at your FRA, claiming at 62 could reduce your monthly benefit to $1,400.

While this might seem like a good option in the short term, especially if you need the money now, you’re locking in a reduced benefit that could last for decades. Given that Social Security benefits are typically adjusted for inflation each year, the long-term impact of claiming early can add up to tens of thousands of dollars—or more—over your lifetime.

3. The Power of Delaying Benefits

Delaying Social Security benefits past your FRA can significantly increase your monthly payout, sometimes by as much as 32% if you wait until age 70. Let’s go back to that same example: if your FRA benefit is $2,000 per month, waiting until age 70 would increase your benefit to $2,640 (an 8% annual increase over four years).

This higher monthly benefit will continue for the rest of your life, so the longer you live, the more you stand to gain. Additionally, the larger monthly benefit can make a significant difference in your overall retirement security. You’ll have more money to cover your expenses, and your monthly benefits will likely continue to increase with inflation, providing more purchasing power over time.

4. What’s the Trade-Off?

Of course, there are some trade-offs to delaying Social Security. The main risk is that you won’t live long enough to reap the benefits of waiting. If you claim at 62 and pass away earlier than expected, you might end up with a larger total benefit over your lifetime. On the flip side, if you live longer and wait to claim, you could ultimately receive far more in benefits.

The decision should be based on several factors, including:

• Health considerations: If you have health issues that may limit your lifespan, claiming early might make sense. However, if you’re in good health and expect to live into your 80s or 90s, delaying could result in a much larger benefit over time.
• Financial needs: If you need the income now to cover living expenses, claiming early might be the right choice, even if it means sacrificing some long-term benefit.
• Spousal benefits: If you’re married, your claiming decision may affect your spouse’s benefits. In some cases, delaying your own Social Security benefits can increase your spouse’s survivor benefits in the future.

5. Other Factors to Consider

While waiting to claim Social Security is often a smart financial move, it’s not the only piece of the puzzle when planning for retirement. Here are some other factors to keep in mind:

• Other sources of retirement income: Do you have other savings or pensions that can cover your expenses in the early years of retirement? If you do, this could allow you to wait until age 70 to claim Social Security, maximizing your benefit.
• Taxes on Social Security benefits: Depending on your total income, your Social Security benefits may be subject to income tax. Planning your Social Security strategy alongside your overall retirement income strategy can help minimize taxes.
• The impact of working: If you decide to continue working while claiming Social Security before your FRA, you could face reductions in your benefit based on your earnings. For 2024, if you earn more than $21,240 per year before your FRA, your Social Security benefit will be reduced by $1 for every $2 you earn above that limit. After reaching your FRA, these earnings limits no longer apply.

6. Is Waiting Right for You?

Deciding when to claim Social Security is one of the most important financial decisions you’ll make in retirement. If you can afford to wait, the increase in benefits from delaying could significantly improve your financial security later in life. However, if you need the money sooner or have health concerns that make waiting impractical, claiming early may be the right choice.

7. Consult a Professional

Since Social Security is just one part of a much larger retirement plan, it’s important to consider your full financial picture before making a decision. A financial advisor can help you calculate the optimal time for you to start claiming benefits based on your personal circumstances, retirement goals, and financial situation.

Final Thoughts

Claiming Social Security early might seem like the right choice in the short term, but in many cases, waiting can significantly boost your lifetime benefits. If you can afford to delay, you may find that waiting until your full retirement age—or even age 70—could result in much higher monthly payments and better long-term financial security. Take the time to evaluate your options and consider how your decision will impact your retirement. After all, you’ve worked hard for those benefits, and you deserve to maximize them.

Have you thought about the timing of your Social Security benefits? Let us know your thoughts or questions in the comments below!