A client approaching retirement age must decide whether to begin taking reduced benefits early or wait until full retirement age (FRA) (or later). For many clients, the present value of the social security retirement benefits they would receive is similar under either option, depending on their life expectancy and tax bracket. Therefore, in many cases, this decision will depend on factors other than trying to receive the most significant lifetime benefit from social security. The Consumer Financial Protection Bureau offers a social security claiming tool to help workers decide the best age to receive retirement benefits.

Some clients will delay retirement and continue to work because of personal preferences. Others will want to retire early and need to start receiving benefits as soon as possible.

Some clients choose to take early social security benefits out of necessity. They are unemployed or underemployed, or they have an immediate financial need. Unfortunately, in many cases, taking the early, reduced benefit ensures their continued financial predicament. Studies suggest that those who take early benefits out of necessity often find themselves in even more desperate straits in later years as they continue struggling with their permanently reduced benefit. Early retirement may be a shortsighted but necessary solution for these individuals.

Those in a better financial situation often have the luxury to wait and allow their benefits to increase, thus ensuring a more comfortable retirement. These are the clients who can best benefit from a planner's help to make an informed decision.

The Social Security Administration provides numerous calculators. These tools help clients find the age at which total benefits received are equal at different starting dates. While clients may have the option of receiving social security benefits as early as age 62, the eligibility age for Medicare remains at 65. So, although they may be able to replace a sufficient amount of their earned income with social security benefits at age 62, they may not adequately replace their employer-provided health insurance for another three years.

Some clients may choose early benefits based on their concerns about the potential insolvency of the Social Security Trust Fund. This insolvency may be a legitimate concern, but complete abandonment of the retirement program is unlikely. It is more likely that the government will alter the tax rate, the wage base, and the benefits of future retirees. Still, planners must recognize this fear among certain clients.

The availability of qualified longevity annuity contracts (QLACs), which provide income guarantees later in life, can alter social security claiming strategies. Instead of delaying receipt of social security benefits to claim a higher amount, clients can take benefits at the average retirement age and then rely on a QLAC to provide increased income later in retirement.

Factors to Consider in Taking Reduced Benefits at Age 62

Even if the retiree has sufficient funds to live on without considering social security, many planners advise clients to begin receiving benefits as soon as possible. In 2023, the benefits at age 62 are reduced by 30% of what they would be at age 67 (i.e., the FRA). Still, the client will receive more social security checks if benefits are drawn early. In addition, drawing early social security benefits may allow the client to leave tax-deferred retirement accounts untouched and grow for extended periods.

Another reason clients may want to receive benefits early is if they have dependents under 18. Such dependents may be eligible for benefits if the clients also receive social security benefits.

Break-Even Point

If the worker waits until the FRA to draw benefits and the primary insurance amount, or PIA (which is a function of his earnings history) remains the same, it will take around 12 years to reach the break-even point to make up for the years of payments that the client did not receive.

The analysis above compares only the social security benefits. It does not consider the forgone investment income Curt could have earned from age 62 through age 67 on the early benefits or the compounded future value of that sum.

The break-even point may vary. For example, there may be one break-even point when the client decides whether to claim at age 62 or 66 (or older applicable FRA). There will be a different break-even point when the client decides between claiming at age 62 or 70. And there will be another break-even point when the client decides whether to claim at age 66 (or older FRA) or 70. Future COLA adjustments also impact the break-even point, which are not reflected in the SSA's benefit estimates. Therefore, the break-even point between claiming early versus delayed could be earlier.

The preceding example illustrates that the worker's life expectancy and the spouse's life expectancy (if applicable) should be considered when determining the starting date for social security benefits. Suppose the client in the preceding example does not expect to live until age 79. In that case, Curt will receive more benefits by taking the reduced monthly payment.

If the present value of future social security benefits is considered, it would typically be more favorable to start the benefits as soon as possible (if the money was going to be invested). However, suppose the client is simply using early social security benefits to replace a similar amount of earned income. In that case, the short-term financial position will not be improved, and the long-term outlook could suffer.

Another factor to consider in taking retirement benefits early is the increased tax cost for some workers. With a smaller social security retirement benefit, the worker may need to draw on other resources to meet expenses. If the additional income exceeds the provisional income thresholds, 50% or even 85% of the worker's social security benefits will be taxable. In addition, the worker who has earned income that exceeds certain thresholds will forfeit some social security retirement benefits.

Factors to Consider in Waiting Until Full Retirement Age

Those who reach age 62 and need income may not have the option of waiting until their FRA before they begin receiving benefits. And those with a shorter life expectancy might be wise to start receiving benefits as soon as they can because they may not receive them for very long.

However, other retirees might carefully consider the long-lasting advantages of waiting until their FRA. Factors to consider include:

• Life expectancy.
• Shortening the retirement period.
• The earnings test.
• Replacing earlier lower-wage years with later higher-wage years.
• The compounding of inflation adjustments on a higher base.
• Effect on the spouse.
• Other assets available.
• Having a higher-earning spouse delay until 70 and having a lower-earning spouse claim early.
• Working part-time.
• Drawing down on qualified plans prior to RMD issues at a later date or when in a relatively low tax bracket in a given year.

Life Expectancy

The client's life expectancy may be the most significant factor in deciding whether to receive social security benefits early. While life expectancy tables and averages are available, a 62-year-old client should have a good handle on his or her own life expectancy. The current health and longevity of parents should be clearly established by that age. In general, 80 years might be a good cutoff point. If the client reasonably expects to reach that age, waiting until the FRA may be a wise choice. Northwestern Mutual Life Insurance Co. has an online lifespan calculator that considers such factors as weight, exercise, diet, family history, etc. Keep in mind that if the client is married, the life expectancy of both spouses should be considered. Also, as the client ages, his or her life expectancy increases.

A 60-year-old client might expect to live to age 82, for example. But a client who has already reached age 66 might expect to live into his 90s.
Shortening the Retirement Period. A significant factor in retirement planning projections is the length of the retirement period. This is determined by subtracting the age at retirement from the life expectancy. For example, if a client wants to retire at age 62 and has a life expectancy of 85, there is a 23-year retirement period to fund. By working past age 62, the client is shortening the retirement period and decreasing the resources needed to fund the retirement regardless of longevity.

The Earnings Test

Clients who are considering receiving social security retirement benefits before their FRA but who also intend to keep working must consider the earnings test. For 2023, the exempt amount is $21,240 (for years before reaching their FRA). This means that social security benefits are reduced by $1 for every $2 in earnings above that exempt amount. Clients already facing a reduced benefit amount because of their early retirement would have their benefits reduced even further by exceeding the earned income exempt amount.

Replacing Lower-Wage Years

An individual's social security benefits are based on his primary insurance amount. The PIA is calculated from the individual's highest 35 years of indexed earnings. If a client can replace lower-wage years early in his or her career with higher-wage years after age 62, the PIA can be increased. This can lead to a greater retirement benefit when the individual retires. A higher PIA will also increase disability and survivor's benefits.

Inflation Adjustments

Social security benefits receive an annual inflation adjustment. By taking early benefits, the individual's starting base for annual adjustments is smaller. For example, if an individual's PIA was $1,000, but he or she retired early and received only $750 each year, he or she would miss out on the compounded inflation adjustment of that $250 in lost benefits. In other words, the gap between the early retirement benefit and the amount he or she would have received by waiting will get bigger and bigger.

The Effect on the Spouse

The individual's decision to start receiving social security benefits before reaching the FRA may also affect a spouse's benefits. Unless the spouse has a personal earnings record and is fully insured, he or she will be dependent on the working spouse's PIA for retirement benefits. A spouse who waits until FRA is eligible to receive 50% of the working spouse's retirement benefit. However, a worker who retires early may have a lower PIA than by waiting until the FRA. Therefore, the spouse's benefit would be based on that lower PIA.

Factors to Consider in Beginning Benefits after Reaching the Full Retirement Age

As shown the analysis above, an individual who works past the FRA receives larger benefits because of the delayed retirement credit. A worker born in 1943 or later receives a credit of 8% per year for each year the worker delays receiving benefits after reaching the FRA until age 70.

If the worker can wait, the delayed retirement credit can have a significant impact. In addition to the higher retirement benefit, the worker will receive, he or she will also shorten his or her retirement period and increase the spouse's survivor's benefit. However, higher earnings after reaching FRA will not increase the worker's PIA by replacing lower-wage years.