How Much Do You Lose If You Retire at 62 Instead of 65?

Deciding when to start taking Social Security benefits is one of the most important financial decisions you’ll make in retirement. You can start as early as age 62 or delay benefits up to age 70. But claiming benefits before your full retirement age (currently 66 or 67 depending on your birth year) results in a permanently reduced benefit amount. So how much do you actually give up by taking benefits at the earliest possible age of 62 versus waiting until 65? Here’s what you need to know.

Overview of Early Retirement Reductions

The Social Security Administration applies an actuarial reduction if you claim retirement benefits before your full retirement age. The reduction is based on the number of months between when you start benefits and when you reach full retirement age.

The reduction percentage varies depending on your birth year:

• For those born in 1943 or later, the maximum reduction at age 62 is 30%.
• For those born from 1938 to 1942, the maximum reduction is between 20% and 30%.
• For those born 1937 or earlier, the maximum reduction is 20%.

In general, claiming at age 62 results in a 25-30% benefit reduction compared to your full retirement age amount. The earlier you file, the smaller your monthly checks will be.

Let’s compare the potential reduction at both age 62 and 65 using some examples.

Claiming at Age 62

Say your full retirement age is 67 and your unreduced benefit amount is $1,000 per month.

If you claim benefits at age 62 (60 months before your full retirement age), your benefit would be reduced by 30% to $700 per month.

The reduction is calculated as follows:

• The first 36 months have a reduction rate of 5/9 of 1% per month. That equals 20% (36 x 5/9% = 20%).
• The remaining 24 months have a reduction rate of 5/12 of 1% per month. That’s an additional 10% (24 x 5/12% = 10%).
• Adding the two percentages together gives you the maximum 30% reduction.

This means if you were entitled to a $1,000 benefit at your full retirement age of 67, claiming at age 62 would permanently drop your monthly benefit to $700.

Claiming at Age 65

Now let’s consider the impact of claiming benefits at age 65, which is 2 years before the full retirement age of 67 in our example.

If you claim benefits at 65, your benefit would be reduced by 13.3% to $866 per month.

Here is how the reduction is calculated when claiming at 65:

• There is a reduction rate of 5/9 of 1% for each of the first 36 months early. That equals 20% (36 x 5/9% = 20%).
• There are no additional reductions beyond 36 months.

So claiming 2 years early results in a 20% reduction, lowering a $1,000 full retirement benefit to $800 per month.

The key takeaway is that for each month you claim benefits before your full retirement age, up to 36 months, your benefit is reduced by 5/9 of 1%. After 36 months, the reduction rate drops to 5/12 of 1% per month.

Difference Between 62 vs. 65

In our example, claiming at age 62 instead of 65 results in a $166 lower monthly benefit ($700 vs. $866).

That’s a $1,992 difference in annual benefits.

Over a 20 year retirement starting at 65, delaying claiming from 62 to 65 would result in $39,840 more in cumulative benefits.

The advantage of waiting grows each year you delay benefits beyond age 62. Here is a table summarizing the monthly benefit at ages 62, 65 and 67 using our example:

The breakeven point where the higher monthly amount from delaying exceeds the total benefits received from claiming early depends on how long you live. But in most cases, it makes sense to wait beyond age 62 if you can afford to do so.

Strategies to Maximize Your Benefits

Deciding when to claim Social Security depends on many personal factors like age, health, marital status, other income sources, and how much income you need. Here are a few strategies to consider:

• Claim at full retirement age – Waiting until your full retirement age lets you receive 100% of your earned benefit amount. For most Baby Boomers, the full retirement age is 66 or 67.

• Delay until age 70 – This maximizes the value of your benefits. Each year you wait beyond your full retirement age up until 70 earns you delayed retirement credits that provide an 8% boost in your payments.

• Claim part of a spousal benefit – If your spouse claimed early, but you delay benefits, you can collect a partial spousal benefit at full retirement age while still earning delayed credits on your own record.

• Claim now, suspend later – If you claim early but later wish to postpone benefits, you can suspend your claim (age 66-67) to accrue delayed credits and restart at 70.

• Restrict your application – This allows you to collect spousal benefits only while letting your own benefit grow until 70. You must be full retirement age to file a restricted claim.

Consult with a Social Security expert to determine the best approach for your situation.

Other Important Social Security Considerations

Here are some other key points to keep in mind when deciding when to take benefits:

• Your monthly benefit will be reduced permanently if you claim early. Once you start benefits, you can’t undo your decision.

• Monthly benefits will be lower but you would collect payments for a longer period by claiming early at 62. Make sure to factor life expectancy into your breakeven analysis.

• You’re no longer required to fully retire to start benefits. Social Security won’t reduce your check if you claim benefits but keep working.

• Benefits you collect before full retirement age will be subject to the earnings test, which could temporarily suppress your payments.

• Married couples have more options to optimize benefits, such as coordinating spousal and survivor claims.

• Your benefits won’t increase any further by delaying past age 70. Make sure you don’t wait longer than necessary.

• Carefully weigh tradeoffs between claiming early versus spending down other retirement assets. You may want to let your nest egg grow while Social Security provides guaranteed income.

• Understand how income taxes impact your Social Security benefits. Up to 85% of benefits could be taxed if your income exceeds certain thresholds.

Claiming early retirement reduces your monthly Social Security income for life. While it’s always an option, try not to take benefits before your full retirement age unless you absolutely need the income.

Frequently Asked Questions

How is the retirement benefit reduction calculated?

The reduction is based on the number of months between when you claim benefits and when you reach full retirement age.

• The reduction rate is 5/9 of 1% per month for the first 36 months early.
• After 36 months, the rate drops to 5/12 of 1% per month.
• The maximum reduction is 30% for those with a full retirement age of 67.

Can I change my mind after applying for Social Security?

Yes, within the first 12 months you can change your application only once. You can withdraw your claim or switch between retirement and spousal/dependent benefits. After one year, your decision is permanent.

What if I claim benefits at 62 and keep working?

Your benefit will be reduced but you’ll still receive payments even if you have wage income. Prior to your full retirement age, $1 in benefits will be deducted for every $2 you earn above an annual limit.

What if I have a pension or retirement account?

Other income sources won’t impact your Social Security benefit amount. However, your benefits may be taxable once half your Social Security plus other income exceeds $25,000 individually or $32,000 jointly.

What if my spouse dies after claiming benefits early?

As the surviving spouse, you would be eligible for the higher of your own benefit or your deceased spouse’s amount. Make sure to weigh how early claiming impacts survivor benefits.

Can I change my mind after starting my Social Security benefits?

Within 12 months, you can withdraw your application and reapply later for a larger benefit. After one year, you cannot reverse your decision.

Conclusion

Deciding when to claim Social Security is a major aspect of retirement planning. While you can start as early as age 62, your monthly benefit will be permanently reduced compared to waiting until your full retirement age or even longer.

Claiming at age 62 instead of 65 could result in around a 13-30% smaller monthly check, depending on your year of birth. Typically, it makes sense to delay benefits beyond age 62 if you can afford to do so. Discuss your options with a financial advisor or Social Security expert. Consider your age, health, life expectancy, marital status, other income sources and taxes to determine your optimal claiming strategy.