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Elder Law and Estate Planning Blog - Lancaster, PA

Wednesday, July 3, 2013

Does it hurt to collect Social Security early?

Financial experts almost always advise us to wait until full retirement age or longer before collecting Social Security benefits, age 66 for those born between 1943 and 1954.  And these advisors have good reasons for this recommendation.

Social Security provides a guaranteed monthly income for the rest of your life, which you are eligible to start receiving as early as age 62.  However, if you start at 62, you suffer a penalty.  Likewise, waiting until 70 years of age gives you a bonus on this monthly income.  In both cases, the penalty and bonus are about 7% a year.  Doing the math, if your benefit at age 66 is the average of $1,268, then starting benefits at 62 will give you only about $913 per month.  Postponing the benefits til age 70 will cause it to expand by nearly a third, to about $1,660, for the rest of your life.

So if you get so much more by waiting, why would you grab Social Security when it’s first offered?  Well, there are four good reasons:

  1. You need the money.  Getting a 7% increase per year on Social Security benefits only helps if you can afford to wait, but if you need the Social Security to pay rent and buy groceries, then you should start drawing benefits as soon as you can.  Besides, most people start drawing benefits before full retirement age.  And you’ve earned the money, if you need it, it is available.
  2. You’re in poor health.  If you don’t expect to live into your 80s or 90s, then it makes sense to start your benefits at a younger age.  Although you’ll be getting less, in the long run you might be earning more.  You are betting against your own longevity, but if you know your medical history (for example, if you have high blood pressure, diabetes, and have suffered a heart attack), you can probably make an educated guess on how much longer you’ll live, and decide from there.
  3. You’re a financial genius.  If you’re the next Warren Buffet, or have a sure-fire investment opportunity, then you can start taking Social Security early and investing it on your own.  It is perfectly legal to start benefits at age 62 and stash the money in your private investment account, and you don’t even have to be retired to collect these benefits.  However, remember these two things.  One, if you are still working while you start receiving benefits, you may have to pay income tax on your benefits.  And two, by waiting you get a risk-free 7% return from the government.  If you can’t do that well by yourself, you should wait.
  4. If benefits change.  Social Security was put in place by politicians of the 20th Century, and future benefits depend on the 21st Century politicians.  Economists have begun to worry that the government can’t afford all the promised payments, especially as the baby boomers retire, and there’s nothing stopping Congress from either lowering benefits or taxing away benefits from people affluent enough to postpone pay outs.  If the risk of a lower benefits outweighs the benefit of the bonus, then it might make sense to take the money while it’s available.

Remember, Social Security decisions should be made based on your individual situation.  What is right for some might not work for you.  The Social Security Administration provides a retirement planner that can help, but a financial planner might offer more advice.

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