Broker Check

Social Security: Why Not Claim Early?

November 14, 2016

Financial experts often advise baby boomers to hold off on collecting Social Security until full retirement age—which is 66 for most—or later. But why? Here’s a look at the numbers.

If you claim at full retirement age, you’ll receive, say, $24,000 a year in benefits. If you start taking benefits at 62, though, your payments are cut by 25 percent, meaning you’ll collect only $18,000 a year in benefits.

Over time, that small difference can take a huge toll. Each year, the gap between the payment you’d receive by claiming early and the payment you’d receive by waiting grows larger. At age 66, you’d receive $25,978 (your benefit of $24,000 plus annual inflation adjustments of 2 percent over four years) by waiting … or just $19,484 (your age 65 payment of $19,102 plus 2 percent inflation) if you claimed early. At age 67, the early claim payment will be smaller by $6,625. At 68, the difference will be $6,757. At 69, $6,892.

Even if you claim early and invest the extra four years of Social Security benefits you’ll wind up with—assuming a return of 6 percent a year and annual benefit growth of 2 percent, for inflation—a stash of just $85,881 at age 66. If you pull enough from that nest egg each year to make up the difference between the smaller payment you’re getting and the larger payment you could have received, you’ll run out by age 83. At 84, you’ll be collecting $9,276 less than you would have if you’d waited, with no investment stash to help bridge the gap.

Of course, if you die before age 83, you’ll come out ahead. However, according to actuaries, a 62-year-old man of average health has a 50 percent probability of living to age 85, a 25 percent chance of living to 92, and a 10 percent chance of making it to 97. Women and anyone in above-average health are likely to live even longer.

Other factors—like health and level of retirement savings—should also be used to determine the best claiming strategy for each person, but for most, the numbers suggest that waiting to claim is often the right way to go.