Choosing the right age to start Social Security benefits is one of the most important decisions in your financial life. Unfortunately, most people are tempted to claim as soon as they become eligible at age 62. This strategy results in reduced lifetime benefits for you and your spouse and may have a lasting impact on your financial future.
If you can afford to wait till full retirement age (FRA) between 66 to 67, or better yet age 70, you can substantial increase your monthly benefit. If you start social security at age 62, you will receive 25% less per month than if you waited till FRA. If you can wait till age 70, then your monthly benefit will increase 32% more than FRA benefit. For example, if your FRA benefit is $1,600 then you would receive $1,200 at age 62 and $2,112 at age 70. It is tough to earn a guaranteed 8% annual return in this interest rate environment!
According to the Social Security Administration, at whatever age you start receiving benefits, you will collect the same amount of total benefits if you live to your average life expectancy. The average life expectancy for a male turning 62 is 83.9 and the average for a female is 86.3.
Taking your Social Security benefit early may have a huge impact on your spouse. The spousal benefit is limited since he is eligible for a percentage of your benefit and a lower benefit equals a lower spousal benefit. In addition, if your spouse outlives you he would be entitled to your full monthly benefit for the remainder of his life. This is known as the survivor benefit. Also, if you claim benefits before FRA, you lose out on a very valuable strategy known as “file and suspend,” where you wait till FRA, file a claim then suspend the benefit immediately. This allows your spouse to collect on your record while their own social security benefit grows and he can collect on the higher benefit at age 70.
The cost-of-living adjustment (COLA) is updated on an annual basis and a lower starting benefit equals lower increases in the future.
Ultimately, the right strategy depends upon several factors including retirement savings, life expectancy, career earnings and goals. The key is to understand all your options before making a decision.