Should I Take Social Security at 62?

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More and more people lately are asking if they should take Social Security early. The general advice people give is that you should delay receiving the Social Security check because you get an 8% raise for every year you manage to wait. The break-even age varies depending on many factors, but it’s roughly between the age of 75 to 80 when delaying your benefits will start to be more beneficial for you financially. So just in case you live a long life, the inflation-indexed benefits are the best longevity protection you can have and you’ll want to max out this benefit. Still, many people want to take the benefits early because they believe they can earn a better return by taking Social Security early and investing that sum.

My investment returns are more than 8% a year. Wouldn’t it be more beneficial for me to take Social Security early and then invest the sum?

So how much do your investments need to return for taking Social Security benefits at 62 to make sense? Let’s find out.

Let me use my own example to illustrate

I logged onto the other day and I was pleasantly surprised to learn that I can already expect to receive $1,777 a month in Social Security benefits even if I never earn another dime. This is good news because the benefit can only go up as more working years go by and I contribute more to the system. The better news is that I always treated this piece of retirement income as icing on the cake since Social Security rules may change in the future. Add in the fact that my wife will also be receiving benefits and things are looking quite good on the retirement readiness front.

But let’s get back to the topic at hand. Under current law, I will get $1,777 in monthly benefits if I elect to receive benefits at the full retirement age of 67. On the other hand, I can choose to take the benefits early at age 62 and get $1,251 or delay and get $2,203 when I turn 70. Here’s the chart that shows for me.

Let’s say I choose to receive benefits right away and I take the monthly $1,251 and invest that income every year. In order for this to make sense for me financially, I would need that sum to grow enough in five years so I can withdraw more than if I were to just wait to collect the benefit check. In other words, I would need to be able to safely withdraw a monthly income of $526 (the difference of $1,777 and $1,251) from investing the five years’ worth of extra checks.

$526 a month equals $6,312 a year. If we use the 4% rule as a rough guide to figure out how much we can withdraw from a set amount of money each year, then we would need those five years of checks to grow to a sum of $157,800. Wow. That sounds like a lot of money. Plugging those numbers into a compound interest calculator tells us that we would need to grow those monthly checks by 38% annually to get to that amount.

We haven’t even factored in taxes yet. You’d need to be an investing legend to get that kind of a return.

Of course, there are plenty of reasons to take Social Security early. It’s just that being able to out-earn the 8% raise by investing isn’t one of them.

These reasons include:

  • Needing the checks to survive. Most people take Social Security early because they need the money. Let’s face it. I’m young, quit my job to start a business that had low earnings for a few years so my earnings history thus far and my retirement estimate is on the low side. Still, $1,251 goes a long way in paying for essential expenses. Add in the spouse’s benefit and we are talking about roughly $2,500 for the average household. For a family that needs the income, $2,500 every month can make all the difference in the world. For the average family with a full career, this could easily be $4,000 a month even if they choose to collect the benefits early.
  • Not wanting to risk leaving money on the table because no one in their family lived past 80. Social Security is extremely cheap insurance, but if you have enough money and don’t need further longevity protection, no one will fault you for taking Social Security early. My dad died when he was 77. His age of death was close enough to the break-even point that it probably didn’t matter that much financially whether he took Social Security early or later. However, I bet that he would’ve felt happier with extra income early if he could take Social Security early.

Should I Take Social Security Early?

Chances are very high that our family would have saved enough to retire even without help from the government program. Still, I may still take Social Security as soon as I turn 62. That’s because I’m a bit more conservative when I look at my investment portfolio and how much I can safely withdraw from the nest egg. I know I will end up always choosing to save that sum when I could’ve taken more money out of the portfolio to spend. If I collect Social Security early, I get to enjoy more income because that check is backed by the full faith of the United States and we would have many more serious issues if Congress decides to cut benefits for retirees who are already receiving benefits. We are talking about potentially having a good chunk of change to spend freely for as long as eight years. It may turn out to be a disastrous decision financially if I live a long life, but it would likely still be a good decision for me because I can afford the potential loss.

What do you think? Do you plan to take Social Security at 62 or are you going to wait?

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  • Ronil says:

    One factor that is not mentioned here is our ability to tell our future. How many of us for sure know at what age we will die? I don’t and I assume no one else does. Collecting it at 62 instead of waiting until 67 makes sense unless you need SSI amount to survive. Collecting early and investing it if you don’t need to use it, you can let it grow and if you happen to pass at 70,80, 90, etc., you can always leave it to your spouse, kids, friends, family, charity… What is not collected, we don’t get to keep, so collect as soon as you can, even if you don’t need the money to supplement your retirement income.

    • David @ says:

      Not knowing when you’ll die is an interesting point for our discussion here. On the one hand, you are concluding that it’s best to collect Social Security early because you don’t know when you’ll die. On the other hand, people are saying that delaying is the right strategy precisely because we don’t know when we’ll stop collecting. Social Security, after all, is the best form of longevity insurance.

      We can only conclude that there’s really no right answer here. No matter what you ultimately decide, know that you really won’t know whether your choice was the right one financially until the day you die.

      Do what you are comfortable with, and double-check your assumptions based on your individual circumstances.

  • Beau W says:

    I’m taking my money right away. My pension plan with the SS check. Will be just fine with me. I’m about 7 years from cashing in my chips and moving on to something else. It’s anyone’s guess what the government has to say about changes ahead. But I’m happy with my investments and my plan.

  • EdG says:

    It’s a little more complicated when you actually get to 62, I’m 63.
    If you use the ACA and want the subsidy your income is very limited.
    Adding SS could put you over, especially if a couple and both take it.
    I have been considering having my wife take it and delaying my SS but that still would have a significant salary impact. So my plan is to wait until 65 when we get Medicare and both take SS. In my life history I also find that compromises have worked the best for me when I can’t completely predict the future. At 65 I won’t get my full benefit but most of it(FRA 66 2/3). I’m concerned that congress may change SS rules that will affect me negatively in the future. If I see something coming in the near future I may just start collecting. I also think that the company’s share of SS should go up to make it solvent. They pretty much have eliminated pensions so they can make it up that way. It would be even worth redirecting 401K company match money to bail out SS.

    • David @ says:

      Thanks for sharing Ed. I was just thinking the other day whether it would make sense to have an option in people’s 401k to buy into the Social Security system. People have always talked about raising the income limit to help fund SS. If they allow 401k participants to buy into the system, that would be similar to raising the system without forcing everybody to pay more.

      I think you are okay with rule changes though. With just two years to go until you are 65, it would take at least that much time for talk to gather steam, then debated, then delayed by the opposition before it’s signed into law.

      And plus, I seriously doubt they are going to touch the benefits for people so close to retirement. No politician can afford to anger the baby boomer population.

      • EdG says:

        Let me clarify about the 401K match. I meant that instead of companies putting money toward the match, they would instead contribute more toward SS. I think having SS stable is more important than a match. But I have no idea what the numbers are, just trying to make it more palatable. I don’t think raising the income limit is fair because the higher incomes only get 15% credit for their SS taxes. SS is biased against the higher income, you get 90% credit up to $926/month, 32% from $927-$5583/month and 15% credit above $5583.
        I was surprised to find out about 8 years ago(at 55) that continuing to contribute to SS would have little impact on my benefits. It just redistributes the wealth.
        I would never voluntarily give the gov’t any extra money, they don’t know how to manage it! And I don’t trust them with it!

        • David @ says:

          I agree with you that SS being stable is much more important than the match, but I still don’t like the idea of having the companies reduce their matches. We already don’t have enough 401k participation in our country, and the match is one of the few incentives we offer to employees.

          Someone suggested that the SS trust could invest in the stock market back in the 2008/2009 crash as a way to ensure its long-term survival. The suggestion was immediately shot down because people were still scarred from the calamity of the Great Recession.

          With the market up basically five to six fold from the lows, we can only dream of what could have been.

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