FRA or Early Retirement: When to Draw Social Security?

About 47% of current retirees begin drawing Social Security before their full retirement age, but the benefits are generally higher the longer one waits.

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3 min read

When it comes to Social Security and when you should start receiving it, the answer is clear: "it depends." Deciding when you should start drawing benefits may involve a bit of probability theory, behavioral economics and, yeah, math.

Although Social Security offers the option to draw benefits as early as age 62, the penalty for doing so before your full retirement age (FRA) can be high. Still, some choose that path anyway. In fact, according to the Social Security Administration (SSA), 47% of current retirees have their retirement base as age 62 to 64, meaning they began drawing before their FRA. Why would they do that? And should you?

First, the Math ... and the Exceptions

If you've ever filed your own tax return, you know that government policies and calculations can be complicated. Social Security is no exception. While the basic FRA is 65 for those born before 1943 and scales up to age 67 for those born after 1960, there are by some estimates about 2,700 rules, exceptions, and contingencies covering things like spousal and survivor benefits, disabilities, working part-time while drawing benefits, and more. 

You don't need a Ph.D. in quantitative analysis to figure it out, but perhaps a bit of high school algebra would help. Basically, if you retire less than 36 months before your FRA, your benefits will be reduced 5/9 of 1% for each month you begin early. So if you retire exactly three years (36 months) early, your benefits are reduced by 20% (5/9 x 0.01 x 36 = 0.20). For each additional month you retire early over and above the 36 months, your benefits will be reduced by an additional 5/12 of 1%, or 5% a year.

Don't want to do the math? Simply go to the Retirement Estimator on the Social Security Administration website. In fact, the site has 11 different calculators covering benefits, reductions, spouse benefits, life expectancy, and earnings tests.

On the other side of the coin, delaying your retirement beyond your FRA can make you eligible for an additional credit of between 3% and 8%, depending on your birth year. 

Probability and Behavioral Economics

If the benefits of retiring later are so pronounced, why are nearly half of current Social Security recipients considered "early retirees?" Here are a few considerations:

  • Questions about Social Security. Many believe the hype about Social Security's impending insolvency. Although it's true that Social Security is strained, and even the SSA acknowledges that unless current rules are tweaked, recipients could start seeing reduced benefits by 2034, the system is not projected to become insolvent. But still, many believe that, once they hit age 62, every month in which they are not collecting Social Security is money lost. 
  • Life expectancy probabilities. No one likes to face the question, "When do you plan on dying?" But really, it's part of the equation. Although retiring early likely means a reduction in benefits, there is a breakeven age at which retiring early may make sense. For example, a person who passes away at age 68 would have drawn benefits for six years if he or she began collecting at age 62, but only three years if starting at age 65. But if your spouse is expecting to continue drawing spousal benefits for many years after your passing, it may still make sense to wait.
  • Medical considerations. It’s important to note that, if you retire before age 65, you may draw Social Security early, but you may not yet be eligible for Medicare. Make sure you’ve put that into your calculations. For example, if you retire from a job that included medical benefits, and upon retirement you must then pay a monthly premium, this may significantly reduce your net benefit. Granted, if you become disabled or are otherwise incapable of working, claiming early may be your best (or only) available option. 

Deferring your Social Security benefits can have clear benefits, especially if you plan on a long and healthy life after reaching full retirement age. However, it may require fighting against some behavioral biases. It may also require an honest assessment about the number of healthy years you expect in retirement. And then, you need to do the math.

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TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

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