You probably know the size of your benefit checks will shrink if
you claim early, but how much it will shrink is not entirely a straight-line
calculation.
Dan
Caplinger (TMFGalagan) Jan 25, 2020 at 10:03AM Author Bio
One of the most controversial questions in
personal finance is when people should start taking their Social Security
benefits. Yet while there will never be complete agreement about when the best
time to file for benefits is, there is at least something of a consensus
about when it doesn't make sense to do so.
The age you are when you claim Social Security
will have a significant impact on how big your monthly checks will be. Many
people are hazy on what the calculation that determines that looks like, but if
you look at the formulas, you'll see some idiosyncrasies that make certain ages
less than ideal.
How claiming early
hurts your benefits
When the federal government started allowing
people to claim Social Security before their full retirement age, it wanted to
make sure that those claiming early didn't get an unfair advantage from
receiving more payments. The Social Security Administration therefore
implemented a formula that reduced the size of the monthly checks that early
claimants received. Those reductions were calibrated so that, assuming people
lived to their average life expectancy, the total amount of money they would
receive from the program would be about the same, regardless of when they chose
to start receiving benefits.
At the time, the full retirement age was 65, and
the SSA's rule reduced benefits by
five-ninths of a percentage point for every month someone claimed early. Those
claiming retirement benefits at the earliest possible age -- 62 -- would thus
receive monthly payments amounting to 80% of what they'd have gotten if they
had waited until they were 65. It was a straight-line rule, and it made it
relatively simple to calculate how claiming early would affect your monthly
checks.
Later, lawmakers implemented a slow increase in
the retirement age from 65 to 67. At the same time, lawmakers changed the
formula for calculating reductions for early claimants. Beyond the first
36 months, the SSA cuts benefits by five-twelfths of a percentage point per
month -- or about 0.42%, versus 0.56% for the first 36 months.
How the Social
Security formula makes claiming at 63 or 64 less attractive
Because of that change, claiming Social Security at 63 or 64 won't make as
much sense for many recipients as other ages. Consider the following chart,
which shows how much someone with a full retirement benefit of $1,500 per month
at age 66 would get based on different claiming ages:
|
Age Claimed
|
Monthly Benefit
|
Change Compared to Claiming One Year Earlier
|
|
62
|
$1,125
|
-
|
|
63
|
$1,200
|
6.7%
|
|
64
|
$1,300
|
8.3%
|
|
65
|
$1,400
|
7.7%
|
|
66
|
$1,500
|
7.1%
|
CHART BY AUTHOR.
As you can see, you get the smallest percentage
increase in your monthly benefit by waiting from 62 to 63. After that, waiting
an extra year gets you larger increases.
A similar thing happens for those whose full
retirement age is 67:
|
Age Claimed
|
Monthly Benefit
|
Change Compared to Claiming One Year Earlier
|
|
62
|
$1,050
|
-
|
|
63
|
$1,125
|
7.1%
|
|
64
|
$1,200
|
6.7%
|
|
65
|
$1,300
|
8.3%
|
|
66
|
$1,400
|
7.7%
|
|
67
|
$1,500
|
7.1%
|
CHART BY AUTHOR.
Here, the increase from 62 to 63 is a little
bigger in percentage terms, and the lowest increase comes between 63 and 64.
Wait just a little bit
longer
As it happens, most people intuitively seem to
understand the trade-offs involved. A huge number of Social Security recipients
claim at 62, but relatively few claim at 63 and 64. Larger sets of recipients
wait until either 65 or their full retirement age to claim benefits, in part
because many still consider 65 the appropriate age to retire despite the changes
to what Social Security deems your full retirement age.
The debate over whether it's best to claim Social Security at
62, 70, or your full retirement age will rage on, and you'll have to come to
your own personal decision about what timing works best for you. But when it
comes to claiming at in-between ages like 63 and 64, there are solid reasons to
avoid it if you can.
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