The calculation of a small number suggests a realistic strategy suggests that it is better to make this profit a little less money, rather than more later.
Waiting to claim Social Security retirement benefits might seem like a good idea—especially if you aim to maximize your payments. If you delay until age 70, you could see an increase of about 25% compared to what you would get if you claimed at your Full Retirement Age (FRA), which is typically between 66 and 67. However, if you choose to start at the earliest age of 62, you could see a reduction of up to 30% in your monthly benefits.
The numbers can be tricky, and they vary depending on when you decide to claim your benefits. While delaying might seem beneficial on the surface, there are some circumstances where it could be advantageous to claim earlier.
1. Payment cuts may be delayed
The concern about Social Security funding is often brought up in political discussions, but many believe that it will be addressed before it becomes an issue. If it turns out that cuts are looming in the near future, I’d prefer to take my full eligible amount now rather than risk reductions down the line.
According to a recent report by a nonpartisan group, Social Security payments could face a 23% cut by 2034 if no changes are made. Personally, I haven’t reached the age to collect benefits yet, but I’m nearing it. It’s unsettling to think about possible cuts, so I want to make sure I can secure a few years of full benefits before any adjustments occur.
That said, my reasoning is somewhat unique, as I also have other motivations for possibly claiming benefits earlier.
2. I can get better profits on money
Last year, the effective return on the money tied up in Social Security was about 2.5%. Compared to that, investing in the stock market could yield around 10% or more, which is significantly better. Of course, this varies, and I understand investing comes with risks, but there’s less upside in waiting for Social Security benefits to grow, at least in terms of potential returns.
The funds being held by Social Security—which amount to about $2.7 trillion—are primarily funded through current worker contributions, mainly taxes. While higher interest rates might help the fund grow, the primary source of payouts is still these worker taxes. So I find myself questioning whether it might be smarter to invest earlier rather than wait for a system that does not yield high returns.
When considering whether to postpone benefits until I’m 70, the math doesn’t always favor that decision, especially if I factor in my life expectancy and financial needs at 62. For instance, I could potentially transform those benefits into a reliable income stream through other investments if I decide to enter the annuity market.
3. Don’t worry about pay cuts due to work-based income
You can choose to start your Social Security benefits before hitting 70, yet still continue working, maybe on a part-time basis. But here’s the catch: if you earn above a certain threshold while receiving benefits, your payments may be reduced. For those not yet at retirement age, the SSA deducts $1 for every $2 earned over $23,400.
These income thresholds do change, especially as you approach your FRA, so if you hit FRA in 2025, the deduction rate will shift to $1 for every $3 earned over $62,160. Yes, that sounds complicated, but it’s crucial to remember that the SSA will adjust future benefits to account for any amount not received while you were earning more.
So, why would someone want to claim benefits knowing they might not receive the full amount due to work income? For some, the hassle of managing this can be a good reason to delay filing. But once you reach your FRA, you can actually work as much as you wish without affecting your current benefits—and your future monthly payments could even increase if your income is high enough.
Therefore, if the plan is to receive Social Security benefits soon and you’re nearing your FRA, be aware of how past income affects your monthly payments. The process can indeed be a bit tricky, especially if self-employed, so it’s wise to consult SSA for guidance.
