The average American worker pays a lot of their hard-earned money to Social Security. You do it so that when you retire, you have a safety net of supplemental income. Because you put so much money into it, you may ask: how early is too early to start pulling from Social Security benefits?

There are regulations in place that allow you to start receiving benefits early, but taking benefits earlier (and for longer) doesn’t mean you’ll get more Social Security income in the long-term. In fact, for most people, it’s exactly the opposite. Taking benefits earlier means agreeing to a reduced benefit — and that reduction is permanent.

If you’re wondering when is the best time for you or a loved one to take Social Security benefits, here are some things you should know and think about.

What is Social Security?

Social Security is a federal government program that acts as a retirement pension plan for eligible citizens. Social Security benefits replace a percentage of a person’s pre-retirement income based on their lifetime earnings. These benefits supplement other retirement savings (investments, cash, assets, etc.) to help cover expenses for retirees. Social Security is funded by American workers through a payroll tax deducted from their wages.

Who is eligible for Social Security benefits?

American workers who have contributed (or “paid into”) Social Security for 10 years or earned 40 credits are eligible for Social Security benefits beginning at age 62 or for qualifying disabilities. 

In 2022, the amount needed to earn one credit is $1,510 paid into Social Security. The credits you earn remain on your Social Security record regardless of job changes or temporary unemployment. Workers can earn up to four credits each year.

How long can you receive Social Security benefits?

Once you’ve earned your benefit and begin taking it, you’ll receive it until you die. If you’re eligible for Social Security and pass away before age 62 — the earliest age you can begin taking your retirement benefit — your surviving spouse and/or dependent children will be entitled to your benefit. The highest monthly Social Security benefit between you and your spouse will equal the survivor benefit once one of you passes away.

What is the normal retirement age for Social Security?

The amount of your Social Security benefit is based on a number of factors, primarily your highest 35 years of earnings and the age at which you start receiving your retirement benefit. For example, your monthly benefit will be lower if you do not have 35 years of earnings and/or if you start them before your full retirement age (FRA). Alternatively, your Social Security monthly benefit will be higher if you start them after your full retirement age.

Your full retirement age (also known as your normal retirement age) is the age at which your retirement benefits are equal to your “primary insurance amount.” Essentially, this is the age at which you can retire and draw your full Social Security benefits without any penalty or reduction. Your FRA depends on the year you were born, and it currently ranges between 65 and 67.

To determine your benefit, the Social Security Administration (a federal government agency) indexes your lifetime earnings and calculates your average indexed monthly earnings during the 35 years you earned the most. So, workers who earn higher wages (and, thus, pay more into Social Security) will have a larger Social Security benefit in retirement.

Early retirement vs. full retirement vs. delayed retirement

You can decide when to start taking your Social Security benefits. You may decide to take them early beginning at age 62, at your full retirement age (between 65-67 based on when you were born), or delayed until age 70. 

When you start receiving Social Security benefits before your full retirement age, you will lock in a reduced benefit for life. That means that the reduced benefit will continue on for the duration of your retirement — even after you reach your normal retirement age. 

On the other hand, if you choose to delay receiving your Social Security benefit until after your FRA, you will receive an increased benefit for life.

Early retirement penalty

The earliest you can begin receiving Social Security benefits is 62 (with exceptions for disabilities). If you start receiving benefits at age 62 — or anytime before your full retirement age — you will receive a permanently reduced amount. The exact amount of the reduction is based on exactly how early you start receiving the benefits, but it could be as high as 30%.

If you start receiving benefits 0-36 months before your full retirement age, your lifelong benefit will be reduced 5/9 of 1% per month remaining until your full retirement age. If the number of months exceeds 36, your retirement benefit is further reduced by 5/12 of one percent per month.

For example, if your full retirement age is 67 and you begin taking retirement benefits as soon as you turn 62, the number of reduction months is 60. The reduction is calculated as 36 months times 5/9 of 1% plus 24 months times 5/12 of 1%, which comes out to a total benefit reduction of 30%. As a reminder, if you take benefits early, this reduced benefit lasts for the length of your life and doesn’t expire once you reach full retirement age.

To further illustrate the early retirement reduction, you can review the Social Security Administration’s chart comparing your full retirement benefit and age 62 benefit. For a full month-to-month breakdown of your retirement benefit from age 62 up to your full retirement, we recommend taking a look at the SSA’s Social Security early retirement penalty chart.

Delayed retirement credits

By delaying retirement past your normal retirement age, you can earn delayed retirement credits that accumulate up to age 70. These credits will increase your monthly Social Security benefit by 2/3 of 1% for each month that you wait. That equals up to 8% each year. This increased benefit is permanent and influences future cost-of-living adjustments to Social Security.

There’s a common idea that people may be better off taking their Social Security benefit earlier and investing those funds into the stock market. But consider the fact that you get a guaranteed 8% annualized return for each year you delay taking Social Security benefits. The stock market cannot guarantee that type of return.

Retired woman knitting at home

Taking social security benefits early: pros and cons

In most cases, we strongly recommend delaying Social Security benefits as long as possible up until age 70 so that you can maximize your lifetime benefit. That said, everyone’s financial situation is different, and there are times when taking Social Security early could be beneficial to you or your family. The primary factors to consider are your life expectancy, whether you’re married or single, and your cash flow needs.

Advantages to taking Social Security early

  • If you have a shorter than average life expectancy, taking Social Security benefits early could be advantageous. With a shorter life expectancy, you likely wouldn’t realize the benefits of delaying your benefits. So, while on paper your benefit will be reduced, you’ll end up using more of your benefit than if you wait.
  • If your spouse has earned higher wages than you or if you are significantly younger than your spouse, you may decide to take your Social Security benefit early. If your spouse delays benefits, you will receive their full benefit once they pass away. As the higher earner, their benefit will be higher, especially if they earn delayed retirement credits. And, if your spouse is unlikely to live well beyond your full retirement age, you will lose out on your earned benefits if you don’t begin taking them early while your spouse is still alive.
  • If you retire and have young, dependent children (under the age of 18 or 19 and a full-time high school student), your children may receive a Social Security benefit equal to 50% of your benefit. So, depending on their age when you reach 62 or your FRA, it might make sense to go ahead and start collecting Social Security benefits.
  • If you retire before your FRA and have no other source of income or need supplemental income, then taking Social Security early will help you cover your living expenses.
  • You’ll be able to take Social Security benefits for a longer period of time.

Disadvantages to taking Social Security early

  • Your Social Security benefit will be permanently reduced. Depending on how early you start taking Social Security, your benefit could be reduced by as much as 30%.
  • Your benefit will be reduced further if and while you continue earning wages.
  • Regardless of your life expectancy, if you are married and have higher lifetime earnings than your spouse, taking Social Security early will reduce your benefit, as well as your spouse’s and/or your dependent children’s survivor benefit. Surviving spouses get the full Social Security benefit of the higher-earning spouse.

Alternatives to taking early retirement

If you are in need of cash to fund your expenses, an alternative to taking early retirement is pulling money from your investment portfolio to help fund your living expenses. Delaying your Social Security retirement benefit past your normal retirement age guarantees an annual return of 8%. This increased benefit will last for the duration of your life. That means you’ll be much less reliant on your portfolio to fund your retirement once you start receiving the delayed Social Security benefit.

In this way, you are “front-loading” your dependency on your portfolio so that you can fully maximize your Social Security benefit and take advantage of a guaranteed 8% annualized return.

If you do decide to take early retirement, you can change your mind and cancel your application within 12 months. You’ll have to repay the benefits you received, and you can resume the benefits later at a higher payout. Be aware, though, that you are only allowed to do this once in your lifetime.

How to apply for Social Security benefits

When you are ready, you can apply with the Social Security Administration to begin receiving your benefits. Applications can be accessed online, over the phone (1-800-772-1213), or in person at your local Social Security office.

To apply, you’ll need to submit your application along with some required documents, including bank information, your birth certificate, and a copy of your recent W-2 tax forms. To help you prepare, the Social Security Administration offers a checklist for applications.

Conclusion: Should I take Social Security benefits early?

Like many other aspects of your financial plan, when to start taking Social Security benefits depends on your specific situation and needs. That said, we rarely recommend taking benefits early and in most cases, we strongly encourage our clients to delay benefits until age 70. Delaying until age 70 will allow you to maximize your lifetime Social Security benefits and receive a higher monthly check. The longer you wait, the larger your monthly benefit will be.

That said, it may be beneficial in some cases to take benefits early. For example, you should consider taking Social Security benefits early if:

  • You are single and have a chronic condition that reduces your life expectancy lower than average.
  • You are significantly younger than your spouse and your spouse is the higher earner and/or your higher-earning spouse is able to delay their retirement benefit.
  • You are no longer working and you’re in need of cash to pay your bills and cover your living expenses.

So, if you’re in good health and/or you’re the higher-earning spouse, you want to delay taking your Social Security as late as possible.

E&G Senior Wealth Advisor Jordan Slingo, CFA, CFP® in a meeting

We recognize there are some alarmists who believe Social Security will eventually go away. Their strategy, then, is to begin taking Social Security as early as possible to make sure they get some of what they paid in before the program goes away. However, this is unlikely to happen or have any impact. If Social Security were to end, it would likely be phased out by age bracket, with the lowest ages being younger than those eligible for taking early Social Security.

Ultimately, for the vast majority of our clients who are in good health with a long life expectancy, are the higher-earning spouse in their marriage, and/or do not have any dependent children once they reach retirement age, we will recommend delaying their Social Security benefit until age 70. This allows them to maximize their benefit and minimize risks like market volatility and inflation.

There is no single “best” or “right” age for everyone to start taking Social Security benefits. At the end of the day, it’s your choice and based on your situation. If you’re unsure of what may be the most financially optimal decision for you and your family, you may benefit from working with a financial planner as you formulate and implement your retirement plan. Our team is here to help. You can reach out to us anytime to book a discovery call to learn more about our services.