Social Security Benefits and Early Retirement

One person determining if they should take early retirement while answering question about cost of living allowance.

With the headline-grabbing cost-of-living adjustment (COLA) set to affect Social Security benefits in 2023, many people are asking if they should take early retirement and file now to “lock in the COLA”. 

Presented by Kris Maksimovich, AIF®, CRPC®, CRC®: 

Like the scarcity of a sale, if the historically high COLA adjustment makes you feel as though you should act, you should think again. Our response to clients who have asked is that they should only file if they were already planning to file. This important decision should be driven by your personal and family circumstances like age, life expectancy, cash flow needs, and marital status, among a few. When it comes to your retirement strategy, you should never allow any size COLA to influence your social security timing strategy.

Filing for Social Security Early Permanently Reduces Your Monthly Benefit

Your social security benefit at your full retirement age (FRA) is referred to as the primary insurance amount (PIA). But you don’t have to wait until your FRA to begin receiving benefits; you may apply for social security as early as age 62. If you do, however, you will face a 20–30 percent reduction in your PIA, depending on your year of birth. It’s also important to note that, once you elect to receive early benefits, the benefit reduction is permanent; you may no longer amend your choice.1 

The chart below shows the percentage of the PIA that a worker would receive when claiming their benefit at age 62.

Year of Birth Full Retirement Age (FRA) Benefit at Age 62 (% of PIA)
Before 1938 65 80%
1938 65 and 2 months 79.10%
1939 65 and 4 months 78.30%
1940 65 and 6 months 77.50%
1941 65 and 8 months 76.60%
1942 65 and 10 months 75.80%
1943–1954 66 75%
1955 66 and 2 months 74.10%
1956 66 and 4 months 73.30%
1957 66 and 6 months 72.50%
1958 66 and 8 months 71.60%
1959 66 and 10 months 70.80%
1960 and later 67 70%

If your FRA is 66 and you start receiving benefits at age 62, you would see a 25 percent reduction in the benefit amount. If your FRA is 67, you would see a 30 percent reduction in your PIA if you started receiving benefits at age 62.

The reduction is calculated as follows:

  • 5/9ths of 1 percent for each of the first 36 months prior to FRA, plus
  • 5/12ths of 1 percent for each month in excess of the first 36 months

Please note: The above calculation applies only to workers. Different social security rules apply to spouses and surviving spouses.

A Case for Staying the Course 

In short, the longer you wait to claim social security (up to age 70), the higher your monthly benefits will be. Waiting can also mean a lifetime of higher benefits for your surviving spouse. Be sure to fully explore your potential retirement income sources before you decide whether to begin taking social security benefits at age 62.

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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. 

[1]At one time, you could elect to “do-over” the social security decision by repaying previously received benefits without interest and reapplying for benefits based on your current age. Now, however, you have only 12 months to reverse your decision. 

Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at info@gwadvisors.net.

© 2022 Commonwealth Financial Network®

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