Two Valid Reasons for Early Social Security Claims

There are two legitimate reasons to claim Social Security before reaching the age of 70.

The first reason is lack of choice. Many individuals find themselves in situations where they have been laid off and are unable to secure employment that matches their previous income. In such cases, claiming Social Security may be a necessary step for survival.

The second valid reason relates to health concerns. If you are facing a disability or a serious health condition that prevents you from working, and you do not have adequate retirement savings, claiming Social Security might be your only viable option.

The First Misguided Reason for Early Claims

In discussions on platforms like Facebook and Reddit, the predominant reason for early Social Security claims is the concept of the "breakeven" point.

This breakeven point refers to the age at which the total amount received by claiming Social Security at age 62 equals the total benefits that would have been received if one waited until full retirement age or even age 70. Many people think, “My breakeven point is age 78, and since most of my family doesn’t live beyond that, I’ll claim at 62.”

This line of thinking may hold some water if you have considerable retirement savings, but otherwise, it is flawed.

Understanding the long-term consequences of claiming Social Security early is crucial. For instance, a recent article on Yahoo.com illustrates that assuming an average full retirement benefit of $1782 in 2024, claiming at age 62 would yield only $1254—a significant decrease. Conversely, waiting until age 70 would result in a benefit of $2209, which is $955 more each month.

Using a breakeven calculator reveals that a person who retires at 62 must live until 79 years and one month to match the total amount they would receive if they waited until 70. If both individuals live to 80, the one who delayed their claim will have received more.

Why is this reasoning misguided, even with a family history of shorter lifespans? First, no one can predict their longevity. You might live well into your 90s, and without adequate retirement savings, the additional $955 per month could be crucial later on.

For married couples, it’s even more critical to delay claiming benefits if possible. Upon the death of the first spouse, the survivor loses the lower of the two Social Security benefits, making the higher benefit invaluable if the surviving spouse lives for many more years.

As I’ve shared in previous articles, I chose to wait until age 69 to claim my Social Security. My wife and I have structured our monthly budget around my Social Security check and a modest retirement annuity, allowing us to save her entire Social Security benefit each month.

If you have a median retirement savings of approximately $200,000 (more or less), fully replacing the loss of one Social Security check will be challenging, so it’s vital to maximize the larger benefit.

Even with over $200,000 in savings, you cannot assume that you can entirely replace the smaller Social Security check. A prolonged market downturn could diminish that $200,000 significantly.

At the very least, you want to ensure you can enjoy your retirement fully while both partners are alive.

The Second Misguided Reason for Early Claims

The article also notes that some individuals opt to take Social Security early to preserve their retirement account funds for their heirs. By claiming Social Security early, they can reduce withdrawals from their retirement accounts, allowing those assets to be inherited.

However, I must reiterate: if you already possess substantial retirement assets, this concern may not be relevant. There are no wrong answers for someone with a pension, over $500,000 in retirement savings, and Social Security.

Nevertheless, opting for a lower Social Security benefit to conserve retirement savings is a common mistake.

Assuming you are in reasonably good health, a better approach would be to withdraw from your retirement funds while using guaranteed universal life insurance. For example, consider a healthy 62-year-old claiming the $1254 early retirement benefit.

Instead of taking the Social Security benefit at age 62, they could withdraw $1614 monthly from their retirement account. The $360 difference could then be allocated to a $200,000 Guaranteed Universal Life Insurance policy. Over eight years, they would have withdrawn $154,944 from their retirement account. After covering the monthly premium, they would still receive $1254 in monthly income.

If they were to wait until age 70 to claim Social Security, they would receive $2209. After paying the guaranteed premium of $360, they’d net $1849 monthly, which is $595 more than the age 62 benefit.

Let’s analyze why this strategy is preferable.

If you take the $1254 benefit at age 62 and leave $200,000 in your retirement account with a 4% return, it will grow to $273,714 in eight years. Should you pass away one year later, your heirs would inherit $284,662, subject to taxation.

At a 6% return, that $200,000 would increase to $318,770, and one year later, it would reach $337,896.

Now, let’s consider the scenario of taking distributions and postponing Social Security until age 70.

Using the Retirement Distribution Calculator from Key Bank, we find that after withdrawing $1614 monthly for eight years at a 6% return, you would still have $115,574 left in your retirement account. One year later, it would amount to $122,508. If you were to pass away that year, your heirs would receive $322,508, which is $3,738 more than if you had left the retirement account untouched. Additionally, your net Social Security benefit would be $595 higher each month, and your spouse would receive $955 more than the early retirement benefit if you were the first to die.

Even with a 4% return, your heirs benefit. After withdrawing $1614 monthly for eight years, you would still have $104,093 remaining. If you passed away the following year, your heirs would receive a total of $288,114, which is $3,452 more than had you left the $200,000 intact. Moreover, only $88,114 would be taxable.

In a scenario where there is a zero net return, you would still come out ahead!

Note: This strategy assumes reasonably good health and may not apply to those with serious health issues or those who smoke. Individuals with significant health problems have a valid reason to claim benefits at age 62.

If leaving a financial legacy is a priority, this approach significantly outperforms the strategy of claiming Social Security early to protect retirement funds. Your heirs would benefit from a larger, more tax-efficient life insurance payout, and you would enjoy an 81.8% larger guaranteed Social Security benefit for life. Furthermore, your spouse would receive a much larger benefit.

Conclusion

For those without serious health issues or who are not forced into early retirement without options or savings, delaying Social Security is typically the better choice.

If you possess retirement savings and are keen on leaving a legacy, consider combining plan distributions with life insurance if you meet the qualifications.

As I've mentioned previously, if you have substantial retirement savings and can withstand a market downturn, your choices may not significantly impact your situation. You and your family will fare well regardless.

For the 71.2% of individuals with less than $250,000 in savings, creating the largest possible guaranteed retirement income is far more critical than focusing on your breakeven age. I've encountered individuals in their nineties who were convinced they wouldn’t live past 80.

For married couples, maximizing the larger Social Security benefit is essential. Keep in mind that one of the two checks will disappear upon the death of the first spouse.

Regarding the desire to leave a financial legacy for your children, I have two thoughts:

Firstly, maximizing your long-term, guaranteed income takes precedence over the concern of leaving money for your children and grandchildren. After all, the last thing you want is to become a financial burden to them in your later years.

Secondly, if leaving a financial legacy is crucial to you, and your health allows, explore guaranteed universal life insurance as a means to provide for your children and grandchildren more effectively than through a retirement account.

I hope this article proves helpful. If so, please leave your comments.

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