More Americans Are Opting for Early Social Security. But at What Cost?

More Workers Plan to Retire on Less Money by Claiming Social Security Early

Hammered by inflation, recession fears and doubts about the future of Social Security, an increasing number of working Americans say they plan to claim their Social Security benefits early while staying on the job. Here are the factors driving this trend and the pros and cons of following suit.

Consider working with a financial advisor to create a retirement plan that fits your goals, risk profile and timeline.

More People Claim Social Security Early

42% of Americans said they plan to file for Social Security before their full retirement age while also continuing to work, according to a 2022 survey by the Nationwide Retirement Institute – up from 36% in 2021.

Workers who’ve paid into the retirement system can claim their Social Security benefits as early as age 62, but that decision can result in a monthly benefit check that’s as much as 30% less than the payment they’d receive at full retirement age, which is between ages 66 and 67 depending on what year you were born. By waiting beyond longer to file, a retiree can increase their Social Security payment by 8% each year beyond the full retirement age they wait to file, topping out at 70 years.

As of February 2023, the average monthly Social Security check among all retirees is $1,693.88, according to the agency. Meanwhile, the average check for a 62-year-old retiring this year would be $1,247.40, while the average payment at the full retirement age of 67 would be $1,782.

Over a 20-year retirement, the monthly difference of $534.6 would add up to more than $128,000 in retirement income, not counting any cost-of-living increases. These adjustments increase benefits by a set percentage calculated each year to keep retirement income paced with inflation.

Collecting benefits early isn’t always wrong, planners note. Many workers start taking Social Security benefits when they’re forced to retire because of corporate downsizing, age discrimination in hiring, illness or the need to care for a sick family member.

The Break-Even Point

Waiting to collect a higher benefit check later means the recipient is foregoing some cash flow. The “break-even” point – where the total benefits collected at full retirement are more than all the cash that could have been collected by starting early – usually comes somewhere around age 80, financial planners say.

Using this year’s average benefit amounts, someone who starts collecting benefits at 62 would collect a total of more than $254,000 over 17 years before they would have collected slightly more by waiting to claim the higher full-retirement benefit. By the year 2040, the higher benefit amount for waiting would produce slightly more than $2,000 in additional total cash (unadjusted for inflation).

Tax Considerations

Social Security benefits themselves aren’t taxable, but a downside of receiving Social Security payments early is that many of the beneficiaries will continue to work, which can make some or even much of their benefits taxable. In fact, that tax can apply to anyone collecting benefits who receives additional income.

A single tax filer receiving Social Security payments who makes more than $25,000 of what the IRS calls “combined income” will be taxed on 50% of his or her benefits, up to a limit of $34,000 in income. At that point, the tax apply to 85% of their benefits. The limits for joint tax filers are $32,000 and $44,000, respectively. Combined income is a taxpayer’s adjusted gross income, plus nontaxable interest income from bonds and half of their Social Security benefits.

Consider speaking with a financial advisor who can help you assess your retirement income and tax plan.

Bottom line

The number of workers claiming Social Security early in their 60s is increasing, which may be due to a multitude of reasons. Everyone’s retirement path is different, so it’s important to calculate your needs and apply your Social Security accordingly. And if you continue to work while receiving benefits remember to estimate your tax penalty.

Tips on Retirement Planning

Deciding when to claim Social Security is only one part of retirement planning. A financial advisor can help you see and understand all the variables that go into a retirement plan. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use our no-cost retirement calculator to get a quick estimate of what your net worth will be when you retire.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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