The Secret Cost of Claiming Social Security Too Early (or Too Late)

Forget the race for the biggest Social Security check. The real question isn’t how high your benefit can go, it’s how well it fits your life, taxes, and long-term plan.

In this episode, James breaks down how the timing of your claim shapes everything: portfolio resilience, tax efficiency, survivor benefits, and the freedom to retire when you want, not when the system says you should.

Starting with the foundation (your 35 highest earning years) we unpack what really happens when you claim early, wait for full retirement age, or delay until 70. You’ll hear how each path affects your taxable income, Roth conversion opportunities, and even the size of your surviving spouse’s check.

It’s not about chasing an 8% “return” on delay; it’s about coordination. For those with meaningful savings in 401(k)s or IRAs, waiting can unlock a powerful tax window that permanently lowers RMDs. And for those still working or navigating a market downturn, claiming early can sometimes protect your portfolio from harmful withdrawals.

By the end, you’ll see how aligning Social Security with your health, income sources, and retirement goals builds an income floor that funds confidence, not just checks.

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The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

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Episode Transcript

SPEAKER_00 (00:00):
Most people think the right age to collect Social
Security is when you're gonnaget the biggest check.
But after years and years ofworking with real retirees, I
can tell you the right age isn'tjust about maximizing the
spreadsheet.
It's about what fits best intoyour life and your overall
financial plan.
So today I'm gonna show you whycollecting too early or even too
late can quietly cost you farmore than you realize.
The important thing to realizeabout Social Security is that

(00:22):
too often it's presented just asa trade-off or it's presented
just as a break-even.
Where if you live past some age,you're better off delaying your
benefit, but if you pass awaybefore that age and you're
better at collecting early.
That's part of it, but that's avery narrow part of it.
And what I want to show youtoday is how social security and
your decision of when to collectimpacts all of your actual
retirement strategy.
And when I say all of it, I meanit impacts your taxes, it

(00:43):
impacts your portfolio, itimpacts your surviving spouse's
ability to protect their income.
Those are the things I want tocover today to help you
understand when it might be bestfor you to take your benefit.
So to understand this in itsproper context, let's back up
and understand how is SocialSecurity calculated in the first
place.
You have what's called a primaryinsurance amount.
That's the amount that you'llreceive at your full retirement

(01:04):
age.
For most of you, your fullretirement age is going to be
somewhere between the ages 66and 67.
My guess is for most of youwatching, it will be at 67.
So how is that primary insuranceamount calculated?
Well, it's calculated by SocialSecurity taking a look at your
highest 35 years of earnings.
So over the course of yourworking lifetime, maybe you had
some odd jobs in high school,maybe you had some odd jobs in

(01:24):
college, maybe you worksporadically in your 20s, 30s,
40s, whatever it is, SocialSecurity looks at your top 35
years of earnings.
Now I know what you're thinking,you're probably earning a whole
lot more today than you were 30years ago.
That's why Social Securityinflation adjusts this.
They look at what's called youraverage indexed monthly
earnings.
So taking inflation intoaccount, how much did you pay

(01:45):
into Social Security everysingle year?
Social Security then uses allthat and it goes through a
calculation that helps themcalculate or helps them
determine how much you areeligible for at your full
retirement age.
That's called your primaryinsurance amount.
Your PIA is what you areeligible for at your FRA or your
full retirement age.
Now, what if you don't have 35years of earnings?

(02:06):
Well, you don't have 35 years ofearnings.
Let's say maybe you have 30,Social Security will use zero
for those remaining five years.
And that will be averaged thenacross the 35 years that they're
looking at to calculate yourbenefit.
So that's how your benefit iscalculated at your full
retirement age.
Now you can collect early, allthe way as early as 62, or you
can wait all the way until 70.

(02:27):
Now, how does that impact you?
Well, if you collect early, thethree preceding years leading up
to your full retirement age,there's an 8.3% annual reduction
in your benefit.
So for example, if your fullretirement age is 67, but you
collect at 66, you will receivean 8.3% reduction in your
primary insurance amount.

(02:48):
So by collecting early, you'recutting into your benefits by
8.3%.
That happens for the first threeyears.
By the way, it's actually amonthly calculation.
So if you collect six monthsearly, it's one half of that
8.3% that you're accepting as areduction to your benefit.
But that's the reduction for thefirst three years prior to full
retirement age.
Then the years after that,you're accepting a 5% reduction.

(03:10):
So any year you collect early,you are accepting a lower
benefit.
Now that's not necessarily asbad as it might seem, and I'm
going to explain in just asecond.
You may want to do that, you maynot want to do that, but that's
how the formula works.
Now the opposite is true.
If you delay your benefit pastyour full retirement age, you
get something called delayedretirement credits.
And delayed retirement creditsare an 8% increase to your

(03:31):
social security benefit everyyear that you delay collecting
after your full retirement age.
So if your benefit at 67 is$2,000, then your benefit at 68
would be 8% more than that,$2,160.
That's a lifetime locked-inamount that you're now
receiving.
Now that 8% increase is helpful,but it's not a true 8% return on

(03:51):
investment like most of us thinkit is.
Let me illustrate why.
I'm going to give you an option.
You can either take$1 this yearand$1 next year, or I can give
you$0 this year and$2 next year.
Now, if you say, wow,$2 nextyear, that's a 100% rate of
return on what I would havereceived in the first example.
You can see how you'd beincorrect in doing that.

(04:13):
You're receiving the same amountin both of these, but in one,
you're deferring your benefit,you're delaying your benefit,
and therefore your benefit ishigher.
Well, that same concept appliesto Social Security.
From an actuarial standpoint,Social Security is trying to
say, how do we normalize thisbenefit such that you would
receive the same amount over thecourse of a normal life
expectancy?
Social Security looks at thisfrom the standpoint that if you

(04:33):
wait longer, we'll pay you more.
If you collect early, we'll payyou less.
All in all, on average, we'replanning to pay out about the
same amount of benefits for anaverage life expectancy.
So it's not truly an 8% rate ofreturn like most people think,
which doesn't mean it's a badthing.
It's just don't necessarilyequate delayed retirement
credits with the same as gettingan extra 8% return on investment

(04:54):
that you might get in otherareas.
So that's just the math so far.
That's set in the context of howyou receive benefits and how
much benefits you might receive.
Now let's look at pros and consof collecting at different ages.
Age 62.
If you collect at age 62, youmight think that it's like a
freedom now approach.
Sometimes you just need themoney.
If you don't have income comingin, if you're not able to work,
if you need to meet your needs,you have the option of

(05:15):
collecting Social Security now.
That's immediate income.
You have it, you own it, it'syours to spend.
You're locking in a lowerbenefit.
So don't make this mistakeprematurely or don't make this
mistake without looking at thefull context of are you still
going to be okay long term?
But that's the Freedom Nowapproach.
Pros and cons to this.
The downside, the con, ofcourse, is you're accepting a
lower benefit.
The other downside is there's anearnings limit.

(05:37):
So if you turn 62 and you startcollecting Social Security, but
you're still working, you have acap on how much you can earn
before Social Security beginswithholding some of your
benefits.
For 2025, that cap is$23,400.
Every$2 that you earn above thatthreshold, Social Security
withholds$1 in benefits.
So for example, if you collectSocial Security and you earn

(05:58):
exactly$33,400, you're$10,000above the cap.
So because you're$10,000 ofearnings above that cap, Social
Security will withhold half ofthat.
So$5,000 from your benefit.
So if you're continuing to workand you're collecting early, you
might want to reconsider thatdecision.
It might make more sense.
In many cases, it does make moresense to delay your benefits

(06:19):
unless you're earning an amountthat's less than that cap.
Now just to make sure we'reshowing all aspects of this, if
Social Security does end upwithholding some of your
benefit, it ends up getting paidback to you down the road.
But if you're gonna have itwithheld anyways, reconsider
does it even make sensecollecting in the first place?
Now the other downside to this,this only applies if you're
married, is if you pass awayfirst, your spouse is eligible

(06:40):
for a much lower survivorbenefit.
One of the best things aboutSocial Security is the way you
can use it not just for yourincome, but to protect a
surviving spouse.
If you collect at 62 and youpass away first and your spouse
did not have a higher earningsrecord than you, your spouse's
survivor benefit is locked in atthe lower amount too.
So if you're gonna do this, makesure that you have contingencies

(07:00):
in place, make sure there's aplan in place to make sure this
is something that you couldafford and your spouse could
afford, depending upon timing ofwhen you both pass.
Now, here's the potentialpositive of this.
I mentioned the one positive,which is of course, if you need
the money, you have the moneynow.
You can spend the money now.
What some people fail to graspis this.
Let's assume you retire at 62.
Well, you retire at 62, you needto pull income from somewhere.

(07:22):
And some people look at socialsecurity and say, I don't want a
reduction, I don't want tocollect a lower benefit today.
That benefit's gonna keepgrowing if I delay it, if I
defer it.
And they see that and they knowexactly what that deferred
growth is gonna be, so they dothat.
But what they fail to take intoaccount is this.
While you are deferring SocialSecurity, you must be living on
something.
So if you're pulling income fromyour portfolio, yes, you're

(07:45):
increasing this income on thisside from Social Security, but
you're permanently reducing yourportfolio size.
And there's an opportunity costfor what you're pulling out of
your portfolio, and that thatamount is no longer going to be
growing for you long term.
So if you hear people talkingabout a break-even age, chances
are very good.
They haven't actually done theentirety of the math here, where
it's not just the breakeven ofsocial security in a vacuum.

(08:08):
You have to think through what'sthe opportunity cost and what's
the break-even when you factorin the impact of earlier
distributions from yourportfolio, knowing that those
are withdrawals that can nolonger keep growing and
compounding for you.
So those are some of the prosand cons of collecting at 62.
The next stage some people mightthink about collecting is at
full retirement age.
So 67.
You might consider this thebalance ground, the middle

(08:28):
ground.
Benefits of this, you'veachieved your primary insurance
amount.
You've hit full retirement age,you get what's considered your
full benefit.
Not your max benefit, becauseyou could increase this even
more, but your full benefit,your primary insurance amount.
At this point, the earnings capgoes away.
Leading up to your fullretirement age, there is still
an earnings cap.
But as soon as you turn fullretirement age, you can earn as

(08:51):
much as you want from outsideincome, and it's not going to
cause Social Security towithhold any of your payments.
So that's the benefit of this ofyou can collect and earn outside
income if you choose to do so.
So if you're of average health,of average longevity
expectations, this could be agood time to take your benefit.
It's kind of that middle of theground option.
It's not the earliest, it's notthe latest, but you're free to

(09:11):
take that.
You're collecting your fullamount.
And here's the nice thing aboutSocial Security.
When you have Social Securitycoming in, the tax benefit of
Social Security is such thatmost states don't tax it.
I'll check with your individualstate because some do, but most
states don't tax it.
And at the federal level, amaximum of 85% of your Social
Security benefit will be subjectto federal taxes.

(09:33):
So when you do begin collectingit, understand that$1 from an
IRA withdrawal is not quite asvaluable as$1 from a Social
Security benefit.
Valuable in the sense that thatdollar is the same amount, but
the after tax amount of each ofthose is going to be different.
You will, in almost all cases,have more money after taxes from
$1 of Social Security than youwould from$1 of an IRA or$401

(09:56):
distribution.
Then you can wait until age 70,play the long game.
And by the way, you don't haveto collect at 62 or 67 at 70.
You can collect at any age thatyou want.
These just tend to be the threemajor milestones that most
people think about, but you cancollect at any age, even in
between this.
But at age 70, pros and cons,the pros you've absolutely
maximized your benefit.
Your benefit is at least 24%higher than it would have been

(10:19):
at your full retirement agebecause you've taken full
advantage of delayed retirementcredits.
This strategy typically worksbest in the following cases.
Number one, for those of you whoare in good health and have high
longevity expectations, youthink you're gonna live a long
time.
It is true that the longer youlive, the more it makes sense to
delay social security.
So if you knew for certain youwere gonna live into your 90s or
100 even, by delaying until age70, you've maximized your

(10:41):
benefit, and that benefitbecomes an income floor for you
for as long as you live.
The other benefit here is bydelaying until 70, that opens up
a great window for you toimplement a Roth conversion
strategy.
Let's assume you retire at 65.
And from 65 until 70, you'redelaying Social Security, you're
living on your cash andbrokerage accounts, your tax
bracket is likely gonna be verylow.

(11:03):
If you're one of those investorsor savers that's accumulated
quite a bit of money in yourportfolio via your 401k or your
IRA, congratulations, you didvery well there.
RMDs are gonna be a bigger issuefor those of you with larger
pre-tax account balances.
So if you have 50,000, 100,000in an IRA or 401k, RMDs
shouldn't be such a big deal foryou.

(11:24):
It's not gonna materially make adifference for the most of you.
But if you have$2 million,$3million,$4 million in the$401 or
IRA, then the requireddistribution that you'll have to
take from that is going to besubstantial, most likely.
That's why so many people whoare in that situation, so much
of the work that we do withclients here at Root Financial
is working with thoseindividuals to say, what can you
start doing in your early tomid-60s to start converting

(11:46):
pieces of your pre-tax accountto Roth accounts and do so in
that tax planning window beforeSocial Security started at age
70, before requireddistributions kick in, but after
you retire, when you're in alower income tax bracket, those
are the perfect opportunities toimplement a Roth conversion
strategy.
So you can start to see how yoursocial security decision isn't
just about maximizing income.

(12:08):
It also impacts your portfolioand the growth on it or lack
thereof, and it's gonna impactyour tax strategy, either
freeing you up or compressingthe amount of time that you have
to implement certain taxstrategies.
So with that context in mind,let's look at some quick hitting
decisions of when might certainstrategies make sense.
If you don't have a long lifeexpectancy, if you're not in
great health, probably makessense to collect earlier.

(12:29):
You're not gonna maximize yourbenefit, but you get that money
today.
That money today is not moneythat will go with you once you
pass away.
So if you want that money andyou're not gonna live a long
time, the better off you'regonna be collecting early.
But consider the impact of aspousal benefit or a survivor
benefit with that.
Now, the opposite of that iswhat if you expect to live a
long time?
None of us, of course, has anyidea how long we will live, but

(12:51):
the longer you live, the betteroff you're gonna be on average
delaying that benefit to laterin later years.
Now, here's an interesting anglethat some people don't consider.
What if you retire, you'redelaying your benefits, and then
the market drops?
When the market drops and you'reliving on your investments, that
can be a very scary place to be.
That can be a dangerous place tobe if you spend too much of your
investments while they're downin value.

(13:11):
You could use social security asa part of your dynamic strategy
to say, I was planning tocollect later, but there's a
market drop here, I might pullthat benefit up.
Not because that changesanything about the break-even
age, but by doing that, thatallows me to avoid spending my
investments at the worstpossible time.
So you can use Social Securityas this additional lever in your
plan to say if there's adownturn, even if I'm planning

(13:34):
to delay, I can always change.
I can always pivot andpotentially start one benefit
and maybe even both benefits ifyou're married.
So the takeaway is this insteadof just asking, how can I
maximize my social securitybenefit?
Ask instead how does this fitinto my overall income plan, tax
plan, investment plan, and mostimportantly, life strategy.

(13:54):
That shift, that shift from adate strategy to a life strategy
is what changes this from a bestguess to an actual strategy
that's going to reinforce yourplan and allow you to do more of
what you want to do inretirement.