When does it pay to take Social Security benefits early?

Census projections say that over the next two decades, some 77 million Americans will pass their 60th birthday. For every one of them, the milestone sets up a dilemma with financial implications for the rest of their lives.

The question: Is it smart to claim Social Security benefits as soon as eligibility begins at age 62? Or is it better to wait until what the government terms "full retirement age," which falls between 65 and 67, depending on the year of one's birth?

Making the right choice means reckoning with tradeoffs. Takers at age 62 pay a price: Each monthly check is forever reduced to 75 percent of what it would have been had they waited to full retirement age. On the upside, they're pocketing for several years a heap of cash that they otherwise wouldn't have had during that period.

Despite the penalties involved, many Americans – about 50 percent, according to the Social Security Administration – take the money as soon as they can get it. But according to several personal finance experts, that decision makes good sense for only a few distinct groups of people.

People still working in their early- to mid-60s are usually wise to wait until full retirement age before claiming benefits, according to Michael Schulman, a New York City certified public accountant with a focus on elder issues. One big reason: After the first $12,960 earned in a given year, a person claiming benefits forfeits $1 in benefit payments for every $2 earned before full retirement age.

"If you're making a substantial amount of money, it's not going to pay to take Social Security" before full retirement age, Mr. Schulman says.

"By taking it at age 62, you're taking the lower benefit, and you're forfeiting it to boot. So there's no point," he concludes.

But even though many (perhaps most) would do better financially in the long run by delaying gratification, the rules are such that certain individuals should at least consider taking their payments early, according to Schulman and other advisers. Here are some of those groups whom they say might be smart to take the money and run at age 62:

1. Those who need the money now

For millions of Americans, calculating the pros and cons of taking benefits early "is a luxury they just don't have," says Joseph Matthews, an attorney in San Francisco and author of "Social Security, Medicare & Government Pensions: Get the Most Out of Your Retirement & Medical Benefits." "There are a lot of poor people in this country, and they all need to get that dough as soon as they can," he says.

This category might include self-employed people who didn't save enough, disabled persons whose medical bills are mounting, and anyone who needs Social Security now to meet their basic needs.

2. Married people who've earned much less than their spouses

A married person is entitled to claim a Social Security check worth half of his or her spouse's. When one spouse has earned substantially more than the other over the course of a lifetime, then the lower earner often exercises that prerogative at some point after the high earner reaches full retirement age.

Yet because a married person can "trade up" to a better benefit, the lower earner at age 62 may as well claim his or her personal benefit, which is based on contributions (however small) that he or she may have made to Social Security along the way. Later, that person can switch to collect on the basis of the spouse's contributions.

"It's an interesting little strategy – you play one against the other," CPA Schulman says. "It really benefits spouses who earned less. It gives them a chance to get a little more money in up front."

3. Early retirees who are living on their investment income

Although some early claimants see their benefits reduced in proportion to their wages, that particular penalty doesn't apply to people whose income is unearned – i.e., who live on "passive" income from investments. So even though members of this group suffer a hit for taking the money at age 62, the price they pay is relatively small since it's not compounded by wage-related reductions. It may even be small enough to make an early claim worthwhile, Baldwin says.

"If I could get my money at 62, I'd ... hold it in an investment account," Baldwin says. "I'd have it available to me if I needed it down the road for a medical condition, or if I didn't need it, I'd leave it to my wife or children. It's not at all irrational to take it early."

4. Social Security skeptics

Social Security may not last forever, at least not in its present form, according to a number of lawmakers and analysts who say changes are needed to save it. In this discussion, some financial planners hear a call to action: If the program is truly uncertain, then it's best to get money out of it sooner rather than later.

"Congress is far more likely to push benefits back for people who haven't claimed them yet than it is to take them away from those who have" already claimed them, says Eric Brotman, a financial planner in Timonium, Md. "The longer you wait, the less likely you are to get it."

Others question this logic. "I just don't think it's sound financial planning to take early retirement based on this fear that your benefits are going to be cut later," Matthews says. "You're taking a certain cut now based on speculation that your benefits are going to be cut later. Well, that doesn't sound too sound to me."

5. Market-beating investors

Those who forgo benefits at age 62 are rewarded by knowing that their benefit check will grow by about 6 percent per year until full retirement. After that, it grows by 8 percent a year until age 70. Schulman says those are good reasons to delay: "Where else are you going to get 8 percent risk-free?'"

Others say a shrewd investor can beat those returns by taking the money and investing it.

"If you don't have that money, you can't invest it," Baldwin says. "If you can put that money aside, it may make more money for you."

6. Those who don't expect to live long

"If one is in poor health or has a family with a history of early death, that actually would be a factor to consider," says Robert Baldwin, a certified public accountant in Charleston, S.C.

To help people figure out when to take their benefits, the Social Security Administration provides an online calculator at www.ssa.gov for computing a "break-even age." This is the age at which a person begins to incur a net financial gain as a result of having waited longer to claim benefits.

Anyone who doesn't anticipate reaching his or her break-even age should take benefits sooner rather than later. One caveat: Because dependents can qualify for survivor benefits, couples should think as a unit about the pros and cons of taking a reduced payout on an early timetable.

7. Those with quality-of-life factors

Sometimes taking benefits at age 62 is the right move for personal reasons that outweigh the ultimate financial costs, according to Matthews. Early benefits may enable a person with a creative passion to quit working and pursue a dream. Even if that person collects a diminished check, the benefit accrued in terms of quality of life may well outweigh the financial price paid.

"You can make what is not necessarily a good financial planning decision," Matthews says, "but it is a good life decision."