If you qualify, you can start collecting your Social Security retirement benefits as early as age 62. The main trade-off you will face if you choose to start this early is that you will receive benefits for more months, but each payment will be permanently reduced versus waiting until later to start collecting. That trade-off makes age 62 both the worst — and the best — age to claim Social Security.
How can that be? On average, people receive about the same from Social Security throughout their lives, regardless of when they start collecting. Early collectors get lower benefits for longer, while late collectors get higher benefits for a shorter amount of time. That fact, coupled with the rest of your financial picture, add up to make your 62nd birthday an ideal day to start collecting or a terrible day.
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Why 62 May Be The Worst Age To Claim
While 62 is the most popular age to start receiving Social Security, there are many reasons not to if at all possible. First, there’s a significant penalty if you’re still working and receiving benefits at 62: $1 in benefits for every $2 in salary you earn above $19,500 per year. That fine makes it nearly impossible to get back to work if you start collecting early, because it’s a huge barrier to collecting a paycheck if you also receive Social Security.
Second, Social Security benefits are adjusted each year in line with inflation. The program applies that inflation adjustment to whatever your existing benefit is. If you’re dealing with a reduced check because you cashed early, it’s much less of your total income that gets that inflation adjustment each year. That exposes more of your potential spending to inflation, forcing the rest of your money to work harder to keep up.
Third, many people who collect at the age of 62 do so because they are no longer working and have not saved enough to collect at a later date before they start collecting. If you claim early because you must, it pretty much locks your lifestyle at that reduced Social Security income level for the rest of your life. While the typical Social Security benefit is enough to keep people above the national poverty level, it generally doesn’t provide that much above that basic income.
Why 62 may be the best age to claim
Despite those challenges, 62 may instead prove to be the best age to receive Social Security benefits. One major reason is that people’s spending (other than health care) tends to decline as they move deeper into retirement. By using your benefit earlier, there is a greater chance that you will have the money available while you can and want to use it well.
Plus, if you’ve been a good saver all your working life, taking your benefits early can help keep more of your money working for you for a longer period of time. This is because you still need money to cover your bills, and money that you have to spend in the next five years or so shouldn’t be in stocks. As much as you can use your Social Security payment to cover your bills, it means you have a lot less to take out from your more aggressive investments with higher potential returns.
On a related note, once you are 72 years old, you need to take withdrawals from 401(k)s and traditional IRAs. Those required minimum benefits (RMDs) can increase your tax burden, increase your Medicare costs and make more of your Social Security taxable just by moving money from one pocket to another.
One approach to lessen the burden of those RMDs is to convert the money in those plans into a Roth IRA. By making partial conversions in low-income years before you turn 72, you can reduce the size of your RMDs and better control subsequent tax and expense charges.
Those conversions are most efficient if you can cover the taxes she create from a source other than your pension account itself. Taking Social Security at age 62 to have some extra cash to cover those conversion taxes can be a great way to protect more of your nest egg for longer.
It’s really about having a plan
If you have a solid plan and a nest that you want to manage for the long term, taking Social Security at 62 can play a big part in your plan. If, on the other hand, you expect to rely on Social Security as your only source of retirement income, then at age 62 you could end up in a fairly low-income situation for the long term.
The main difference is the end-to-end retirement plan you set up before you decide to collect. The sooner you start making that plan, the better your chances of falling to the side of 62, which is a great age to start taking advantage of your benefits. So start making your plan today and put yourself in a stronger place to take Social Security when it makes more sense to you.
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Chuck Saletta has no position in any of the listed stocks. The Motley Fool has no position in any of the listed stocks. The Motley Fool has a disclosure policy.