The Hidden Costs of Claiming Social Security Early and When It Actually Makes Sense

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Sometimes it seems people spend more time researching what smartphone to buy than how to strategize Social Security in retirement. Many don’t realize that starting Social Security benefits too early or too late can cost you considerably.

How do people approach Social Security strategy?

Nearly one third of people claim Social Security benefits as soon as they turn 62, according to the Congressional Research Service. When they do that, they permanently reduce the dollar amount of their Social Security checks by 30%.

On the surface, this seems short-sighted. After all, a few years of being patient can get you the entire benefit you’re entitled to, and if you wait a few years beyond that, you can even increase your checks by 8% for every year you wait until you turn 70.

While it’s definitely true that you leave Social Security money on the table each month when you claim early, sometimes there are extenuating circumstances that make it a sensible decision.

Involuntary retirement is all too common. A person in their late 50s or early 60s, working a good job and on track for their retirement savings goal, suddenly loses their job. Paychecks stop, and finding comparable employment at that age is undeniably difficult.

In cases like that, people often need to claim Social Security early for financial survival.

Other reasons to file early include receiving a serious diagnosis that may cut your life short; if you’re unlikely to live for 20 more years, it might make more sense to start benefits now so you can begin using that money immediately.

On the other end of the spectrum, about 10% of people wait until age 70 to claim Social Security, gaining them an additional 8% in their checks for each of the three years they delayed their benefits.

That’s a tempting proposition. After all, where else can you get a guaranteed 8% boost in today’s market? That’s potentially a large amount of additional money you will collect, especially if you live into your 90s.

Market conditions can also influence early claiming. If the market drops 40% right as you retire, your $500,000 nest egg is suddenly reduced to $300,000. That can understandably cause you to panic and jump at the quickest way to make up for that lost money.

However, in doing so, you risk the market recovering before you actually need to tap into Social Security to survive. If the market recovers a few days after it falls, but you’ve already activated Social Security, the extra income you’d planned on by delaying benefits will be permanently inaccessible.

How should you strategize your Social Security benefits?

Many people think Social Security decisions are just about simple timing: Start benefits early and risk getting less lifetime money, or start them late and risk passing away before the extra income makes up for the money you didn’t get while you were delaying benefits.

This is known as the “break-even analysis.” How long do you need to live to make the shorter collection of larger checks net you more money than the longer collection of smaller checks? That analysis needs to consider much more than just the simple math of lifetime benefit calculation.

For example, every year, Social Security adjusts its benefit checks to account for inflation in what’s called the Cost of Living Adjustment (COLA). If you get $1,400 a month in 2026 after starting benefits at age 62 and the COLA for 2026 is 3%, you will get $1,442 a month next year. If you delayed benefits until 70, you’d be making $2,480 a month in 2026, and the 3% COLA would increase that to $2,554 a month.

Those increases cause your benefits to compound dramatically over decades of retirement.

You also need to take taxation into account. Retirement accounts such as IRAs have required minimum distributions (RMDs). The government requires you to take a certain percentage of your retirement account as income each year after you turn 73. That income is taxable, which means the larger your RMD, the larger your tax bill will be.

In some cases, you can reduce your lifetime taxation by delaying Social Security benefits and living on your retirement accounts until you turn 70, as this means your RMDs will be smaller.

Seek professional guidance

This article is just a small taste of the often bewildering complexity of properly strategizing Social Security. Making this decision on your own is risky and could cost you lifetime benefit amounts, unnecessary taxation or both. It’s important to work with a financial adviser to help chart the best path forward for your unique situation.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.