Should you take Social Security at 62?

Taking Social Security as soon as you're eligible is tempting. After all, you've likely been paying taxes into the system for your entire working life, and you're ready to get your benefits. Plus, you would get a boost from the guaranteed monthly income.

But there’s a trade-off. Claiming your retirement benefit when you turn 62 can be a pretty costly decision. Some of the costs are associated with the rules of the program and others with retirement planning in general, so it’s important to understand them fully.

If you can afford it, waiting is often the better option. Ideally, you want to evaluate your decision on when to take Social Security based on how much you've saved for retirement and your other sources of income. While most people would benefit from waiting to, say, age 67, to take payments, others could risk running out of money too soon and may have fewer options.

The costs of taking Social Security early

For starters, you'll forfeit future increases in your monthly income if you take Social Security early. Suppose you’re 62 and eligible for $1,200 per month. If you wait until your full retirement age (FRA) of 66 to start claiming benefits, that amount will rise 33% to approximately $1,600 per month. Claiming at 62 reduces your benefit approximately 25% below your FRA amount. If you delay taking benefits until you are 70, your benefits will jump another 32% to $2,112 per month. Plus, your annual cost-of-living adjustment (COLA) is based on your benefit. If you begin Social Security at 62, your COLA will be lower too.

If you plan to claim benefits based on your spouse's work record, you'll lose even more by taking benefits before you are 66. The benefit reduction is greater for a spouse—30% instead of 25%. For instance, if you're the spouse of the person in the above example, you'd be eligible for only $560 a month at age 62, which is 30% less than the $800 a month you would get at your FRA of 66.

Your decision to take benefits early will live on even if you don't. If you die, your spouse is eligible to receive your monthly amount as a survivor benefit (if it's higher than his or her own amount). But if you take your benefits early, those payments will be less than they could have been for the remainder of your spouse’s lifetime.

Broader costs to your retirement plan

It's natural to want to retire as soon as you can, but it's crucial to consider the earning and investing power you may give up if you stop working full-time to take Social Security at age 62. Most obviously, if you leave a job with good pay and benefits, it may be difficult to ever regain that level of compensation if you need to return to work later.

And while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments: The average yearly cost of health insurance for a 62-year-old individual is $9,825, and prices have been rising much faster than inflation or Social Security COLAs.  Why cut your benefits permanently just to pay for health insurance?

Moreover, if you stay on the job past age 62 your Social Security retirement benefits will increase each year, up to age 70. Delaying retirement for even a few years can substantially increase the size of your retirement savings and at the same time increase your Social Security income. Both of these factors combine to increase the chances for a successful retirement plan. Conversely, if you stop working at 62, you will stop tax-advantaged saving opportunities and cap your Social Security benefits. You may begin to draw down your savings earlier.

When cash is available, it's always alluring to take the money and run. But when it comes to Social Security, this can indeed be a very costly decision. Draw benefits as soon as you can, and you will permanently reduce payments to you and your spouse and lose the chance to keep saving and planning as advantageously as possible. It's often better to wait, and to tap other savings if you need to. Then Social Security can fund the largest possible portion of your retirement for the rest of your life.

Source:  Fidelity Investments 

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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