The Real Cost of Claiming Social Security at 62 Could be Bigger Than You Think

You’ve probably heard that an early Social Security claim will shrink your retirement checks. You can start your benefits as early as 62, but you will receive a reduced monthly income compared with the standard benefit you’d have collected if you waited. 

However, while you may be aware that your payments won’t be as large with an early claim, chances are good that you don’t know just how high the cost of this choice is.

Here’s the harsh reality of what an early claim could mean for your finances, so you can make a better, more informed decision about when to claim your retirement income. 

How much will a Social Security claim at 62 cost you?

When you’re trying to calculate the cost of an early Social Security claim, you need to look at two different factors:

• The monthly cost of an early claim
• The lifetime cost of an early claim

What is the monthly cost of an early claim?

It’s easy to understand the monthly impact of starting Social Security ahead of your full retirement age.  You shrink your standard benefit by 5/9 of 1% per month for each of the first 36 months you claim Social Security ahead of FRA and by 5/12 of 1% per month for any prior month.

So, if your FRA is 67 (which is the case for anyone born in 1960 or later), a claim at 62 will result in a 30% reduction in your standard benefit. If you were on track to get $2,000, you’ll get $1,400 instead if you begin receiving payments at 62 instead of waiting five more years. 

The monthly income left on the table is actually even higher than that, though. That’s because you can earn delayed retirement credits for each month you wait after your full retirement age until you’ve turned 70. So, a claim at 62 also means passing up the chance to increase your benefit. If you’d waited to claim a $2,000 standard Social Security until 70 with an FRA of 67, you’d have increased your monthly payment by 24% and brought home $2,480. That’s a far cry from the $1,400 you’d have collected at 62.

What is the lifetime cost of an early claim?

Understanding the lifetime cost of claiming Social Security early is harder because you don’t really know how long you’re going to live. Whether you’re in great health or are suffering from chronic conditions, it can be really hard to estimate your lifespan. For that reason, it can be helpful to look at data that shows how a typical retiree is affected if they start Social Security ahead of FRA. This data isn’t pretty if you were hoping an early claim wouldn’t cost you all that much in the end.

A report from the National Bureau of Economic Research revealed recently that more than 90% of Americans should wait until 70 to claim Social Security. The report also calculated that an early claim reduces the present value of household lifetime discretionary spending by a shocking $182,370. 

In other words, you could leave more than $182,000 on the table if you start benefits at 62 instead of waiting and making a delayed claim at 70 after maxing out delayed retirement credits.

Why does an early claim cost you so much?

Claiming at 62 ends up costing you a lot more than you think for two reasons. For one thing, you’re giving up the chance to significantly increase your (likely) only source of guaranteed lifetime income that’s protected against inflation.  

Another more important issue, though, is that life expectancies have gotten longer since the creation of Social Security’s system of early filing penalties and delayed retirement credits. This system was intended to equalize lifetime benefits for early and late filers, so early and late claimers would ideally receive the same total lifetime income from Social Security. However, since lifespans have gotten longer, most people now live long enough that their lifetime Social Security income is considerably higher if they wait. 

You should be aware of how much less money you may find yourself with late in retirement if you opt for an early benefits claim and talk with a financial advisor about your options so you can decide if an early claim truly makes sense for you in the end.