Deciding when to start taking Social Security is one of the most significant financial decisions you’ll make as you approach retirement. While conventional wisdom often suggests delaying benefits to increase your monthly payout, there are scenarios where taking Social Security at age 62—the earliest possible age—can make financial sense.
Understanding Social Security Timing
Before diving into specific scenarios, it’s essential to understand how Social Security benefits work. The age at which you start receiving benefits significantly impacts your monthly payment:
- Early Retirement (Age 62): You can start receiving benefits at 62, but your monthly payment will be reduced by approximately 25-30% compared to your full retirement age (FRA).
- Full Retirement Age (FRA, typically 66-67): This is the age at which you receive 100% of your calculated benefit.
- Delayed Retirement (Age 70): For each year you delay taking benefits past FRA, your monthly benefit increases by about 8%.
When Taking Social Security at 62 Makes Sense
While delaying benefits generally results in a higher monthly payout, several factors might make it advantageous to start at age 62:
- High Expected Returns from Investments
If you have access to investment opportunities with high expected returns—such as private equity, hedge funds, or other alternative investments—it might make sense to take Social Security early. By electing to receive benefits at 62, you can invest those funds in higher-yielding opportunities that could outpace the increased benefits you would receive by waiting.
For example, if you expect a private equity fund to generate annual returns of 10-15%, the compounded growth on these returns might surpass the incremental benefit increase you would get by delaying Social Security. In such a scenario, the opportunity cost of not investing early outweighs the benefit of waiting for a larger Social Security check.
- Shortened Life Expectancy
If you have health issues or a family history that suggests you might not live into your 80s or beyond, taking Social Security at 62 could be the better option. In this case, it’s about maximizing the total benefits you receive while you’re alive, even if each monthly payment is smaller.
- Immediate Income Needs
Sometimes, financial necessity dictates the decision. If you’ve retired early or are facing a gap in income, starting Social Security at 62 can help bridge that gap. This could be particularly relevant if your investments are in illiquid assets that can’t be easily converted to cash without penalties or losses.
- Spousal Considerations
Your marital situation can significantly influence the decision to take Social Security at age 62. Here are some scenarios where it might make sense:
- Lower-Earning Spouse: If you’re the lower-earning spouse, and your higher-earning spouse plans to delay filing for Social Security to maximize their benefit, it could be beneficial for you to start taking your Social Security at 62. This allows your household to begin receiving income earlier while still enabling the higher-earning spouse to receive a larger benefit later.
- Significant Age Gap: If there’s a significant age gap between you and your spouse, it may make sense for the older spouse to start benefits at 62, particularly if the younger spouse intends to delay benefits until 70. This strategy can help ensure a steady income stream while also maximizing the surviving spouse’s benefit in the long run.
Comparing the Numbers
To visualize how the timing of Social Security benefits affects cumulative payouts, consider the following chart. It shows the cumulative Social Security benefits you would receive over time, depending on whether you start at 62, at your FRA, or delay until 70.
Conclusion
While delaying Social Security can provide a larger monthly benefit, certain situations—such as high expected returns from investments, shorter life expectancy, immediate income needs, or specific spousal situations—can make taking Social Security at age 62 the right choice. Understanding your unique financial situation and goals is key to making the best decision for your retirement.