Deciding when to retire is a very personal decision that depends on many factors like your financial situation, health, and retirement plans. Retiring at age 62 has some advantages and disadvantages when compared to retiring later.
One of the biggest considerations is how retiring early will impact your Social Security benefits. While you can start taking Social Security as early as age 62, doing so will result in permanently reduced monthly payments. However, you’ll also get benefits for a longer period of time.
This article will provide a detailed overview of how your Social Security benefits are calculated, what percentage of benefits you’ll receive if you start them at age 62, how spousal benefits work, and some strategies to maximize your total lifetime benefits. We’ll also discuss other financial tradeoffs to keep in mind when deciding whether to retire at 62 versus a later age.
How Social Security Benefits Are Calculated
First, it’s important to understand how your Social Security retirement benefits are calculated, as this will determine how much of a reduction you’ll see if you claim benefits early at 62.
Your Social Security benefit amount is based on your average monthly earnings over your 35 highest earning years. Specifically, the Social Security Administration (SSA) adjusts or “indexes” your earnings to account for changes in average wages since the year the earnings were received. Then they calculate your average indexed monthly earnings (AIME).
The benefit formula takes your AIME and applies a percentage to calculate your primary insurance amount (PIA), which is the monthly benefit you would receive if you start collecting at your full retirement age. For people born in 1960 or later, full retirement age is 67.
Here are the key steps:
- Determine your 35 highest earning years
- Adjust each year’s earnings for inflation up to the year you turn 60
- Take the total adjusted earnings and divide by 420 months to get your AIME
- Apply a formula to your AIME to calculate your PIA – this formula provides replacement rates of 90% of the first $960 of AIME, 32% of AIME between $960 and $5,785, and 15% of any AIME over $5,785
- Your PIA is the monthly benefit amount you would receive if you claim at your full retirement age
So in summary, your full monthly Social Security benefit is based on your lifetime earnings history. Claiming before your full retirement age results in a permanently reduced benefit amount.
Social Security Benefit Reductions at Age 62
If you were born in 1960 or later, your full retirement age for Social Security purposes is 67. But you have the option to start claiming your benefits as early as age 62.
Claiming at 62 comes with a major tradeoff – your benefit amount will be permanently reduced based on how many months before your full retirement age you file.
Specifically, claiming at age 62 reduces your monthly benefit amount by approximately 30%. So if your full retirement age benefit is $1,000 per month, claiming four years early at age 62 would mean receiving $700 per month (a $300 reduction).
The Social Security Administration applies an early filing reduction factor for each month you claim before your full retirement age. For a retirement age of 67, here is how much benefits are reduced depending on when you claim:
| Age You Claim Benefits | Full Retirement Age | Percentage Reduction |
|---|---|---|
| 62 | 67 | 30% |
| 63 | 67 | 25% |
| 64 | 67 | 20% |
| 65 | 67 | 13.3% |
| 66 | 67 | 6.7% |
As you can see, the earlier you claim, the larger the reduction to your monthly payments. Your benefit will be permanently lowered by this percentage unless you withdraw your application within 12 months and repay all benefits received up to that point.
Impact on Spousal and Survivor Benefits
If you are married, deciding when to claim Social Security gets more complicated because you need to consider how your decision impacts your spouse.
Spouses are eligible for benefits based on their partner’s earnings record. Specifically, a spouse can receive up to 50% of the primary worker’s benefit amount.
So just like the worker’s benefit, spousal benefits will be permanently reduced if claimed before full retirement age. And early filing by the primary worker means reduced benefits for the spouse down the road.
Another consideration is survivor benefits for the spouse after the primary worker passes away. The survivor can receive 100% of the worker’s benefit amount if they wait until full retirement age to claim. So early filing by the primary worker means lower survivor benefits for the spouse if the worker dies first.
The key thing to remember is that your claiming age impacts both spousal and survivor benefits for your spouse, not just your own retirement benefit. Coordinating optimal claiming strategies for couples involves looking at tradeoffs and overall lifetime benefits.
Break Even Analysis
When considering claiming Social Security early at 62, one helpful exercise is to estimate your “break even” age compared to waiting.
Your break even age is the age where the total lifetime benefits received from early claiming equal the total lifetime benefits from waiting to claim at full retirement age.
This analysis can help you evaluate whether claiming early makes financial sense based on actuarial tables of average life expectancy for your gender and age cohort.
Let’s walk through an example:
- Full retirement age benefit: $1,000/month
- Benefit at age 62: $700/month (30% reduction)
- Life expectancy: 85 years old
If you claim at 62, you would receive $700 per month for 23 years (from ages 62 to 85), for total lifetime benefits of $194,400.
If you wait until full retirement age of 67, you would receive $1,000 per month but for only 18 years (from ages 67 to 85), for total lifetime benefits of $216,000.
In this example, your total lifetime benefits from waiting until full retirement age are about $22,000 higher compared to taking reduced benefits at 62.
The “break even” point where cumulative benefits are equal is around age 80. Only if you live beyond that point would early claiming at 62 potentially make sense to maximize your benefits based on average life expectancy.
Of course, your full retirement age benefit, life expectancy, and break even analysis will be different based on your specific situation. But this example illustrates how to think through the tradeoffs when considering early retirement.
Other Factors Beyond Just Total Lifetime Benefits
While the break even analysis is helpful, there are some other factors to consider beyond just total lifetime benefits when deciding whether to claim Social Security at 62.
Health and longevity
If you have reason to believe you may have a shorter than average life expectancy due to poor health, claiming early benefits may make sense to get some value.
Spousal age difference
With couples, if there is a significant gap where the higher earning spouse expects the lower earning spouse to live many additional years, optimized strategies may involve the higher earner delaying benefits as long as possible.
Still working
If you claim benefits before your full retirement age while still earning income from work, your benefits will be subject to earnings test reductions. Once you hit full retirement age, the earnings test goes away.
Other retirement resources
If you have significant other assets, pension benefits, or retirement savings, you may have flexibility to claim Social Security earlier. Conversely if Social Security benefits will be your primary source of income, delaying may be preferable.
Taxes
How your benefits get taxed also needs to be considered. Claiming early when your other income is lower may allow more of your benefits to escape taxation compared to later.
Timing of break points
Because the Social Security formula is progressive, there can be advantages to pulling benefits earlier around certain age-based break points in the formula before credits max out.
So in summary, while the breakeven analysis is a good starting point, several other personal factors should come into play when making a nuanced early versus late claiming decision.
Strategies to Maximize Lifetime Benefits
Depending on your situation, there may be some strategies you can use to maximize your total lifetime retirement benefits from Social Security. Here are some common ones to consider.
Minimize early claiming reductions
If you need benefits before your full retirement age, consider claiming as late as possible such as at age 64 or 65 instead of 62 to limit the permanent reduction.
Claim now, suspend later
You can claim spouse and spousal benefits early while having your own benefit continue to grow until age 70 by suspending your portion later.
Claim part of the time
It may make sense to claim benefits at 62 but then suspend them at your full retirement age, allowing you to earn delayed credits up to age 70.
Coordinate spousal claiming
With couples, optimized claiming strategies involve the higher earner delaying as long as possible while the lower earner claims early.
Take advantage of widow benefits
Surviving spouses can switch to higher survivor benefits if the deceased spouse claimed early but had waited to enable survivor protection.
Consulting with a financial planner can often help analyze nuanced situations to develop a Social Security maximization plan. The decisions you make at age 62 set the foundation, so choose wisely.
Conclusion
Deciding when to retire and claim Social Security benefits is very personal and situation dependent. While tempting, claiming Social Security early at age 62 comes with a significant tradeoff of permanently reduced payments.
But for some, claiming as soon as possible, even with smaller checks, enables more years of benefit payments during early retirement. Doing break even analyses, considering your health and longevity, coordinating optimally with your spouse, and developing claiming strategies can often help maximize your lifetime benefits.
