For purposes of collecting Social Security benefits, the conventional wisdom says that you should not retire until you have reached your full retirement age (FRA).
However, there may be circumstances where it would be advantageous to retire when you reach 62.
A 2015 study by the by Center for Retirement Research shows that 48% of women and 42% of men who claimed Social Security in 2013 elected to retire at 62.
Did these people make the right financial choice? It depends.
Some of the most important factors that will influence your decision to retire early (62) or at your FRA are as follows:
- Your anticipated life expectancy
- The amount of Social Security benefits you will receive at FRA
- The estimated rate of return you could earn on your benefits if you were to receive them early
The benefits of waiting until FRA to receive your benefits are substantial.
First, since you will be receiving a larger amount your monthly income will be higher, but, depending on your life expectancy, the total number of checks will be fewer than had you retired early at 62.
Second, you will receive not only your regular monthly benefit but an additional 8% per annum every year thereafter until you die. An 8% compounded return over time can be significant and add to the total amount of your disposable retirement income.
In addition, the annual 8% increase is complemented by an annual cost of living adjustment (COLA), which further increases you monthly benefits and helps guard against inflation.
Another benefit for waiting until FRA? Should you die, your spouse and any other beneficiaries will receive your full amount at the time of your death.
If you retire at 62, the survivorship benefit is locked-in at your lower amount.
Unless you need the money for living expenses, the decision to retire at 62 for the most part is a question of simple arithmetic.
Calculate the total amount you could generate in the period between 62 and your FRA from investment return on the reduced benefits paid and any part-time earnings.
If that amount far exceeds the opportunity cost of receiving a higher amount but at a later date, then it makes financial sense to retire early.
Automatic returns
In short, how much better off would you be by receiving more checks, but at a lower amount?
Here is the financial scenario that most would need to overcome. According to Rob Kron, head of investment and retirement education for BlackRock, if you have an FRA of 66 and take your benefit at 62, you’re signing up for a 25% lower benefit than if you had waited until 66 and a 43% lower benefit than had you waited until 70.
That is a significant hurdle to clear for those contemplating retiring at 62 — especially if they don’t plan on working part-time.
In addition, for every $2 of earnings from part-time employment, Social Security will withhold $1 in benefits in excess of the lower exempt amount, $16,920.
In addition, the agency also withhold $1 in benefits for every $3 of earnings in excess of the higher exempt amount, or $44,880. A somewhat mitigating factor is that once you reach FRA, your benefits will be increased to offset the years that your benefits were reduced.
Another reason to retire early is if you would be better off investing your smaller benefit proceeds on top of part-time earnings during the period until FRA.
For most, this would be a tall order. The 8% automatic annual increase on top of monthly benefits that are higher, make it difficult to surpass the breakeven point.
The bottom line? Each individual should make their own calculations. But unless you could earn a return greater than 8% annually, there are compelling reasons to wait until FRA.
