Should You Take Social Security at 62, 66, or 70?

By Todd Campbell Markets Fool.com

Social Security benefits can be claimed at any point after a recipient turns age 62, and most Americans take their Social Security as soon as they can. Claiming benefits early can be smart, but it can pay off to wait. If you're deciding when to start receiving Social Security, here's what to consider.

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Estimate your expenses

Retirement usually means a big drop in income, and if you don't have a solid grasp on what your spending is going to look like in retirement, then you won't be able to make the best decision on when to claim.

Image source: Getty Images.

Depending on who you talk to, experts usually recommend budgeting for 70% to 80% of your pre-retirement income to cover expenses in retirement. However, the exact amount you'll need depends a great deal on your specific situation.

According to the Bureau of Labor Statistics (BLS), retirees spend the most money on home mortgages and auto loans, so if those loans won't be paid off when you retire, you'll need to budget accordingly. Overall, the BLS reports that the average65-plus household spends about $44,664 per yer, and housing and transportation account for $15,529 and $6,846 per year, respectively.

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When you're figuring out your retirement expenses, it's smart to overbudget for healthcare. If you're healthy, your costs might not increase significantly at first, but you'll likely require more healthcare as you get older, and that healthcare won't be cheap. Healthcare spending in over-65 households totals $5,756 per year, according to the BLS, including $3,900 for health insurance and another $672 for medicine. Fidelity Investments estimates that a couple retiring at 65 this year will fork out over $260,000 in healthcare expenses during their retirement. The tally could be tens of thousands of dollars higher if you need long-term care at some point, too.

Social Security options

If you've paid into Social Security over a career lasting at least 10 years, there's a good chance you'll qualify for benefits.

You can claim your benefits when you turn 62, but the amount you'll receive in income if you claim early will be less than you'd otherwise receive. If you go the claim-early route, apply three months before you turn 62, so that you can receive your first check in the month after you turn 62.

The only way to receive 100% of the benefit you're eligible for is to wait to claim until you reach your full retirement age. Your full retirement age depends on the year in which you were born, but for people turning 62 this year, it is 66 years and 2 months.

You can receive more than 100% of your benefit by waiting to claim until after your full retirement age. You'll receive delayed retirement credits that increase your payment for every month beyond your full retirement age that you delay. Thosecredits work out to about an 8% increase in your benefit for every year you hold off.

The following chart shows how much a Social Security recipient would receive if their full retirement age is 66, their benefit is $1,000, and they chose to claim benefits between age 62 and age 70.

Data source: Author's calculations.

While this example shows how benefits change depending on when you claim, the exact amount you'll receive in benefits is determined by a complex calculation based on your highest 35 years of earnings.

You can create a login here to view your actual Social Security benefit, but the average monthly Social Security check this year is $1,360, andthe average check paid to recipients who are age 62, age 66, or age 70 is $1,077, $1,333, and $1,482, respectively.

Once you know your expected Social Security income at age 62, age 66, and age 70, add to it any other sources of retirement income, such as pensions and investment income. If you've been thorough in calculating your projected retirement expenses, then you should be able to use these number to determine at what age you can reasonably expect to be able to afford to retire.

Important considerations

If you have ample income from other sources, it might make the most sense to embrace a claim-early-and-invest strategy.As you can see in the following chart, waiting to claim benefits doesn't break even with taking them early until you reach your late 70s or early 80s, depending on when you claim. If you claim early, invest your Social Security checks, and earn a return on those investments, then you could conceivably push that breakeven point back even further.

Data source: Author's calculations.

You should also consider that when you claim benefits can have a big impact on your spouse's financial security after your death. Widows and widowers can receive 100% of your benefit amount if they've reached full retirement age, but if they're younger than that, they'll only receive a fixed percentage of your benefit. Therefore, if you claim early and receive a smaller monthly benefit, it may not be enough money for your surviving spouse to maintain his or her lifestyle.

If you're working in a high-paying job (relative to what you earned early on in your career), you might want to delay claiming your benefit. If you've already accumulated a 35-year work history, additional high-earning years will replace lower-earning years in your benefit calculation, thereby giving your benefit at full retirement age a boost.

Furthermore, if you plan to continue working in your early 60s, then you should know that the IRS taxes Social Security, up until you reach your full retirement age, if your income exceeds specific limits. In those cases, lowering your tax bill by delaying when you claim might be a smart choice.

Overall, when to claim your Social Security benefits is one of the most complex, and important, choices you'll face ahead of retirement,so make sure you understand the various retirement strategies available to you.

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