Stephanie O. Joy, Esq.
Retire at 62 or 70? HUGE Difference in SS Benefits
Updated: Dec 6, 2022
Note: This article/video is for general information only and is not legal advice to any particular reader or individual. For legal advice, you must specifically retain a lawyer who evaluates your specific situation.
The Big Question: Does It Matter When I File For My Retirement Benefits? YES! "When" you file for your long-earned and paid for Social Security Retirement Insurance benefits can make an immense difference to what you will receive and possibly your quality of life or that of a dependent. The Social Security Retirement Insurance (SSRI) benefits differences that depend on when we decide to file to collect, what age we are at, is often a critical factor in the quality of our senior-hood.
Between the ages of 62 and 70, the impact is a very significant difference in amount per month, forever*. That said, the reduced amount at age 62 or starting at any age less than our full retirement age (FRA), is not a penalty but, rather, it is a choice. Read on to learn about your choices at various ages. (Scroll down.)
Note: Not a Penalty but an Option
Often referred to as a 'penalty' for the choice of collecting Social Security Retirement benefits before the official, "normal" or "full" retirement age, the reduction in the due monthly amount when started early is not actually a penalty at all. Rather, when we take at, say, 62 instead of 67, let's face it, we are taking 5x12 months, or 60 months, of extra payments from our own insurance proceeds we bought, that others who wait til age 67 are not choosing to take early. They are getting 60 payment months less than those that choose to start early, so they have more remaining to collect later, in the form of a higher amount per month. If taking 60 extra payments was 'free', we'd all choose it, right? But, we don't all collect early, before our FRA, because we hopefully make our choice after weighing what benefits us as individuals and families, first.
Tip: We can only collect "early retirement" before our FRA if we are not working for earnings that exceed the early retirement earnings test. See here for more on the RET.
Note: We Each Pay For Our Own Choice Of That Option - No One Else
The money to make those many extra payments to an Early Retiree does not grow on trees, nor does it fall out of the sky, nor from our neighbor's savings. Rather, it is taken off the top (or bottom?) of the Retiree's future potential monthly payments that may be due him for the months forward for the rest of his estimated life. (As some look at it, it is scraped off the top of each future payment, making them smaller, but up-fronted to the Early Retiree now, earlier.)
Early Retirement: Early Retirement is starting to collect your SSRI benefits before your Full Retirement Age (also called 'normal' retirement age). (See here to learn your FRA.) FRA is generally now between 66 and 67 years of age, depending on birth year.
There are many reasons some folks decide to take at 62 or any year prior to their FRA. Some choose so by misinformation, with great regret later. Myth: They believe they get to collect a reduced amount now, vs. none now, and that the amount will somehow 'jump up' to what would have been their full retirement amount, once they age up to that FRA year. Not so. It will not increase when you age up.
Some undeniable reasons for taking early, however, include :
Poor health: an inability to continue working to meet bills. (Remember that Social Security Disability filing is an option that can prevent a person under FRA from suffering the reduced Early Retirement benefit result.)
Longevity: They don't think they'll live to see 67 or 70 or 80+ -- an anticipated short life span may come with a 'use it or lose it' decision.
Caretaker: a need to caretake a spouse or loved one who needs full time company or assistance such that continued work outside the home is not possible. (Ideally, we'd see more 'kincare' compensation for this need, but that is an article for a different day.)
Basic Financial Need: an actual current need for the income now, for general financial reasons, for basic survival or a better standard of living now.
At FRA or Later: Some people decide not to take at 62, instead, waiting for Full Retirement Age, or even delaying beyond their FRA, to start after retirement age (up to age 70). This latter choice is called Delayed or Deferred Retirement. Whatever the personal choice, be informed of what you are gaining and giving up when doing so, in case it would affect your decision.
Case Study: Let's take a look.
Here is Margit's Annual Social Security Statement that provides an estimate as to what she will get, depending on the age in which she files.
Taking the Earliest "Early Retirement": Here, "Margit62", if taking at 62, will collect $1,451/month for the rest of her life (excluding COLA increases or if she continues to work or goes back to work, to an extent that it can change her PIA (Primary Insurance Amount)).
Taking at Full Retirement Age (FRA): If Margit waited 5 years til her FRA of 67 (let's call her "MargitFRA"), she'd receive $2,196, which is quite a bit more that $1,451 (+$745).
Taking after Delaying Retirement: If she waited til age 70, "Margit70" will receive her Deferred/Delayed Retirement amount which is even greater, at $2802 per month (+$1351 over age-62 amount). After turning 70, there is no point here to waiting further because the benefit amount will not increase based on additional deferring.
Sometimes one will start to collect at some here in-between the above.
Example: Waiting For 1 Year After She Turns 62
What if Margit62, instead, waited one more year after hitting 62, to age 63, before applying for her Retirement benefits to start? "Margit63" would still be starting early, and won't get her $2,196, but not as early as 62, so her reduction will not be quite as big at 63. This 1 year wait will increase her payment amount a bit from the age 62 amount, or cause a smaller reduction from her PIA. By waiting til 63, Margit63 actually gets an estimated $121 'raise' in benefit amount per month over Margit62 (although way less than MargitFRA or Margit70. See chart above. ($1,451+$121=$1,572). Of course, she forewent $1451 for 12 months in her 62nd year, which totals $17,412, that she did not collect from SS in that 62-aged year. When she then starts collecting at 63, she is getting that $1451+$121=$1572 per month for the rest of her life. Remember, Margit62 is stuck at $1451 per month for life.
Forfeit and Recoupment: How many months must Margit63 survive and collect at that higher rate, to make up for the $17,412 she forewent in that one year? $17,412 / $121 = about 144 months or 12 years of an extra $121/month to break even - to negate that forfeit. (Remember though, she is enjoying the extra $121 per month for all those 12 years of recouping.)
So, Margit63, living and collecting 12 years makes her 75 years old when she has recouped that $17k+.
All life's months after that, for Margit63, continue at that $1,572/mo. amount (plus COLAs). If Margit63 lives another 5 years, to 80, years old, the extra $121 (her $121, "beyond her age-62 amount" because she did wait that 1 year to 63), means an additional $1,452 per year ($121x12 months) or $7,260 in that 5 year period from 75-80 ... and so on. She recouped her 17k 'loss' of the year between 62 and 63 by her 75th birthday, got to live on another $121 per month all those years that Margit62 did not and still does not enjoy, and by the 5th year after breaking even at age 75, she is up over $7k compared to if she'd taken at 62.
(Again, this is because she did gain herself that $121 raise for all those extra months and forever, by waiting that 1 year). Each year for the rest of her life she is living on $1,572/mo instead of $1,451 in SS benefits per month, or an extra $1,452 per year.
One idea: Does the amount per month make a notable difference to basic living later, when one can't work even if one wanted to? i.e. How valuable to Margit is that $121 'raise' she secured by waiting and giving up that one year of $17k? It may be VERY important to her. For another, it may not. It will be particularly unimportant to a person who, for instance, doesn't live that long to enjoy it.
Waiting til FRA
The same idea applies for those that choose to wait even longer, such as til full retirement age (FRA). Here, MargitFRA gets $2,196 if she waits for her FRA of 67, which is $745/month more than if she took at 62. But, that wait choice will cost her... and hopefully gain her. Remember, MargitFRA didn't collect early retirement for those 5 years...unlike Margit62.
Forfeited: 5(years) X 12(months per year) X $1,451(benefit per month)=$87,060 between age 62 and age 67 that MargtFRA forfeited by NOT taking early.
So, she forfeited the $87k over those 5 years, to wait to secure a significantly larger monthly payment later. How long, starting at 67 when she starts collecting, will it take Margit to overcome that forfeit? To get it back?
Recoupment: Well, we know she gets well more than the $1451 she'd otherwise be stuck with, from 67 into the future - she is getting $2,196, which is $745 more per month than the $1451 she'd otherwise be limited to.
To gain back that $87k forfeit, how many months of that 'raise' of $745 must she survive to fully recoup? $87,060/$745=117 months, or about 9.7 years.
So, 67 years old +9.7 years of collecting = 76.7 years of age, and she breaks even. She also gets to enjoy the higher benefits all during those months of recoupment. (Side notice: This is only about 19 month longer in breaking even than Margit63.) (MargitFRA also gets to 'live' on $2196 per month for all those years she is recouping, from 67 to 76, unlike her early counterparts (Margit62 and Margit63) stuck with $1451 or $1572, respectively.) Thereafter at 76.7, MargitFRA will start to be ahead, gaining more than she gave up, by that additional $745/month. At this point, the $745 is all monthly gain over the $1451 she'd otherwise be stuck with had she collected at 62, like Margit62. Or $624 over what she'd be getting if she'd started at 63 like Margit63. Can you see the merits of waiting to start?
Another fact: After MargitFRA recoups/breaks even at age 76.7, and another 5 years passes (60 payments), that extra $745 per month is $8,940 more than Margit62, each year. Each 5 years, then, she collects $44,700 more than Margit62. Remember, her early-alter-ego who took at 63 only gains about $7k over Margit62, for that same 5 years. (Margit62 gains nothing.) MargitFRA may opt to use it for living, or save it to leave a nest egg to a deserving loved one, or stranger, or charity... She likely has more choices than her early counterparts. And so on... Some say it is a way for a working person who was not able to accumulate wealth, to leave a tidy legacy, or head start, for their deserving loved ones. Others say, heck no! Live high on it!
Another view, if this is survival money: She is living on $2,196 and not just $1,451 per month. For those relying on SS benefits for sustenance, this can be a critical difference.
Opting for DELAYED Retirement - Age 70?
OK, so for those willing and able to delay collecting Social Security Retirement benefits until age 70, the maximum beyond which there would be no purpose, what is the gain?
Margit70, if she waits til 70, will collect $2,802 (before COLAs) per month, starting at age 70. Look at that difference in amount between age 62 and age 70! That is a hair short of doubling her monthly income by waiting those 8 years to collect.
What is the forfeit she gave up for that greater monthly benefit? If she aims on recouping those lost years? 8(years) X 12(months per year) X $1,451(benefit per month) =$139,296 she didn't collect over those 8 years (and she didn't spend or burn).
Her benefit of $2,802 is $1,351 more per month than the $1,451/month she forfeited. But at 70, she starts collecting and is getting that $1,351 more per month for a total of $2,802/month. (Life may be easier for her now, than had she started earlier but for less.) It will take her $139,296 / 1,351 = 103 1/4 months to get that $1,351 per month extra to recoup that $139k forfeit. That is 8.6 years. Notice how the time to 'recoup' the forfeit diminishes?
So, at 78.6 years old, Margit70 will be starting to be ahead of the game, having broken even and now each month she is ahead of the game by $1351. Of course, while she was "recouping" she was living on $2,802 and not $1,451. Each year going forward, she collects an additional $16,200 to live on (or save or play with, depending on her additional finances, if any, more than Margit62. MargitFRA received $8,920 more than Margit62 per year). Every 5 years, then, Margit70 takes in about $81k more than Margit62. What can she do with that extra $81k over each 5 years?
What will your choice be? Do you collect sooner but be stuck with less forever? Or do you hold out for a larger monthly income amount? These are just some of the basic factors to consider.
But, wait! There's more. And it is outside my lane, so I will only mention them so you know to go to a professional in that arena.
Taxes. If you collect in any given year, how will doing so effect your taxes? This is likely more relevant for those with other retirement income aside from Social Security, because higher income, tends to cost us more taxes and even higher tax brackets. Social Security is often taxed. So take heed. This may or may not become a reason to not collect early or even at FRA.
Another factor: Dependents. If you will have dependents of yours eligible for collecting a Social Security "dependent" or "auxiliary" benefit if YOU file and collect your own, that may cause you to decide to file earlier than you would have, so they can collect as well. Or not. Let's say you have a 17 year old who will be able to collect (with you as Representative Payee) for only 1 year, til the age of majority. Is 1 year of her collection a big enough positive to cause you to take earlier than you may otherwise? Can you 'suspend' your filing after she is done collecting, so as to grow your benefit later? All things to look into!
There are many areas in life where "when" to collect may have an impact, so do your due diligence!
Good luck and a Healthy and Happy Retirement!
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