4 Reasons I'm Claiming Social Security at 65 -- and Why It Makes Sense for Me

When should you start collecting Social Security benefits? It's a frequently asked question because there's no universally correct answer. You can start them at any time between 62 and 70, but each choice has its pros and cons. The earlier you claim, the smaller your payment, but the longer you collect. At the other end of the spectrum, claiming later in life increases the size of your payment, but you're going to be receiving fewer of them in your lifetime.

After giving it careful thought, I'm pretty sure I've decided that filing at the in-between age of 65 is the best choice for me. Here's a closer look at the four very interrelated reasons why, which I'm willing to bet apply to plenty of other investors, too.

1. The math makes sense

The trade-off in payments for claiming Social Security benefits before our intended full retirement age (FRA) isn't insignificant. Filing at age 62 reduces your monthly payment to only 70% of what it would have been had you waited until your FRA (67 as of this year). Conversely, beginning benefits at the maximum age of 70 raises them to 24% above the payment you'd receive when initiating at your full retirement age.

Waiting until age 65 instead of claiming at 62 would reduce the gap to just 13.3% below my projected full retirement age benefit. While I'd still receive a smaller monthly check, I'd begin collecting benefits two years earlier, assuming I live to at least age 67. That trade-off makes sense to me, because of the second reason I plan to file at 65.

2. I'll still be willing and able to work some at that time

I'm fortunate to have employment that isn't an all-or-nothing affair. I can work more, or less, or something in between. Right now, I'm working full-time because I'm trying to tuck away as much as I can for retirement. But I may not want to do quite as much work at that time.

In other words, I'll be able to phase into retirement. Having a little Social Security income at the time will help smooth out any income inconsistencies.

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There's no real penalty for earning work-based income after I've already begun receiving Social Security retirement benefits, either. Although the Social Security Administration will reduce your benefits payment if you earn enough taxable income once you're collecting, this money isn't lost. It's simply credited to your future payments. And even then, this reduction doesn't last forever. Once you reach your full retirement age, you'll start getting all of your newly calculated benefit payment regardless of how much work-based income you earn from that point on. And yes, this taxable income can continue to increase the size of your Social Security payments, which are recalculated every year to reflect these new contributions. It may not raise your benefit, but it certainly won't reduce it.

3. I've got a growth plan for these cash payments

That being said, one of the chief reasons I'm willing to accept smaller Social Security benefit payments at age 65, in exchange for collecting them for a longer period, is that I don't expect to need the income immediately. Also, I've got a growth plan for this cash. I'm going to invest it in reasonably liquid short- and near-term bonds and Treasuries, as well as higher-yield money markets that I can turn into cash with a one-day turnaround. I might even use it to buy some defensive dividend stocks.

Doing this wasn't always advantageous. There was a time not too long ago when the net effective annual gain from delaying the start of Social Security benefits varied from 2% to 6%, or roughly 2% to 3% above inflation. Without a comparable alternative available in the open market, it made more mathematical sense to just let the program's typical effective returns build.

With interest rates now back to more normalized levels, though, I've got more options for making more from this money. Some banks' money market accounts are currently yielding as much as 4%, while plenty of interest-bearing bonds offer even more.

Of course, if I need some cash at that time, I'll still have access to it.

4. I'm still counting on payment cuts at some point in the future

Last but not least, at the risk of seeming unnecessarily alarmist, I think legally mandated cuts to Social Security benefits are inevitable. I'd like to collect 100% of what I can for as long as I can before those reductions are imposed.

The latest projection from the Social Security Administration suggests that, without any changes in the meantime, a 22% across-the-board reduction in benefits payments will go into effect in late 2032. I'm reasonably confident that the shortfall will be shored up one way or another, kicking the solvency can down the road. The ultimate underlying problem isn't going away, though. That is, there just aren't enough people contributing enough money to the entitlement program, which is under strain because the number of beneficiaries drawing from it is growing more than anticipated, since people are living longer than they used to.

The countdown to 2032 doesn't affect me either way because I won't be 65 -- or even 62 -- by then. The next time this problem rears its head again, though, it will likely be bigger and even less surmountable, and I'll be at an age then where I've got something to gain or lose from how it's handled. Just to be cautious, I'll take as much of this money as I can while I know I can.

It's admittedly a bit easier for me to think this way, however, knowing that I've got other retirement savings to also lean on.

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