Rosalind Evans
The Impact of Early Social Security Claims
When claiming Social Security retirement benefits, experts generally agree that it’s best to delay. Despite this advice, many individuals claim their benefits as early as possible, either at age 62 or before reaching their full retirement age. Claiming early results in reduced Social Security benefits for life.
To receive 100% of the benefits you’ve earned, you must wait until your full retirement age, which ranges between 66 and 67, depending on your birth year. For the highest benefit, retirees should wait until age 70 to claim. However, some people need help to afford to delay due to poor health or financial constraints.
Concerns About the Future of Social Security
Research indicates that many people claim benefits early because they worry about the future of the Social Security program or want to maximize their benefits as soon as possible. Responding to a recent CNBC article about the benefits of waiting to claim, some readers expressed strong opinions. “It’s already highway robbery,” one reader wrote. “You just don’t want them [the government] getting their money back, do you?”
Despite such concerns, experts maintain that waiting to claim is generally beneficial. “In the grand scheme of things, delaying claiming Social Security is one of the safest things that you could probably do to protect yourself over time,” said David Blanchett, head of retirement research at PGIM DC Solutions, the global investment management business of Prudential Financial.
Investing Instead of Waiting
Investing their Social Security benefits early can yield better returns. “If an individual starts collecting at age 62 and puts the benefits in an S&P index fund for eight years, that individual would be way ahead of postponing collection until age 70,” a CNBC reader wrote.
While the S&P 500 index has seen substantial gains, such as a 26% increase in the past year, there are no guarantees that returns will consistently be high. According to Blanchett, while the market may average a 10% return annually, inflation-adjusted returns are closer to 7%. A 5% annual return expectation is more reasonable for a balanced portfolio of stocks and bonds.
An individual who waits until age 70 to claim Social Security benefits will receive a benefit about 77% higher than they would receive at age 62—each year of delay from full retirement age results in an 8% benefit increase.
Comparing to Bond Yields
Experts suggest that comparing delayed Social Security benefits to bond yields rather than equities provides a more accurate picture. “If I were going to compare Social Security, I should be comparing to bond yields,” said Joe Elsasser, a certified financial planner and founder and president of Covisum, a Social Security claiming software company.
Delaying Social Security appears much more reasonable compared to bond yields, given that benefits are adjusted for inflation and provide income for life.
Passing on Money to Heirs
Some individuals prefer to claim Social Security early and rely more on their 401(k) savings, as these can be passed on to heirs, unlike Social Security benefits. “You can’t pass your Social Security onto heirs while your 401(k) can be, so it’s best to take Social Security early and withdraw less from your 401(k),” a CNBC reader noted.
However, coordinating Social Security with other assets involves considering longevity and taxes. “People notoriously underestimate their life expectancy,” Elsasser said. Longer lifespans mean that more extensive Social Security checks can help maintain your standard of living and protect other assets in later years. For tax efficiency, delaying Social Security often makes sense, as withdrawals from traditional 401(k) plans may be less favorably taxed compared to Social Security benefits, where only up to 85% are subject to federal taxes.
The Break-Even Age
Many focus on the “break-even age” when deciding when to claim Social Security, which is the point where the total benefits from delaying equal the benefits of claiming early. “The person who withdraws at 62 will have the same amount of money as the person who withdraws at 72 by the time they both reach 78, their expected date of death,” a CNBC reader wrote.
While the break-even age can be a valuable reference, experts advise considering the entire financial situation and personal longevity. Improved healthcare and economic resources mean today’s retirees may live longer than previous generations. According to Elsasser, couples should also consider both partners’ longevity, which often supports delayed claims.
While there are valid reasons for claiming Social Security benefits early, delaying often provides greater financial security and higher lifetime benefits. As David Blanchett emphasizes, delaying the claim of Social Security is one of the safest strategies for protecting your financial future over time.
