The following is adapted from Keep It Simple, Make It Big.
As retirement approaches, you start thinking about it more and more, and you might begin wondering whether you should take early Social Security.
With Social Security, when you collect determines what you get. The earlier you take it, the less you receive. Benefits are permanently reduced by an assigned percentage for each year benefit is taken before full retirement age.
Originally, the full retirement age was 65. To shore up the system’s finances, it has been increased based on birth year. It’s 66 for those born between 1943 and 1954, and it phases up for those born between 1954 and 1960, two months for each year, topping out at 67 for those born 1960 and later.
You can take your benefits earlier, starting at age 62, but whether you should depends on your particular situation.
Can You Collect Early?
In deciding whether you should take early Social Security, you must first determine whether you can. You may not be able to collect early even if you desire to do so.
First, you must be at least 62.
Second, to qualify for benefits, you must have paid into the system for forty quarters, or ten years, or be attached to someone who has. Spouses are eligible for 50 percent of the primary earner’s benefit, and divorced spouses are eligible for benefits based on their ex’s earnings, if they were married for ten years, are at least 62 years old, and are not remarried.
Third, you must not have an earned income in retirement of more than $1,470 a month or $17,640 in 2019. (Note: In the year a person reaches full retirement age, they can earn up to $3,910 a month.)
Technically, you could still collect early with more earned income than this, but it would be very unwise to do so, since the heavy penalty imposed on your Social Security benefit would substantially reduce or eliminate the real value of earnings. The penalty is $1 for every $2 earned over the limit.
How Much Do You Need It?
If it’s possible for you to take early Social Security, you must then consider how much you need the money. If you can wait, it’s usually a good idea to do so, because you can receive far more if you wait to your full retirement age.
For example, a person with a full benefit of $2,500 at age 67 will collect only $1,750 at 62. That’s a permanent reduction of nearly a third. There’s a substantial penalty for early withdrawal!
The flip side of being punished for retiring early is that the government will pay you to wait longer as well. For those born after 1960, the benefit at age 70 will be 124 percent of the full retirement benefit you would get at 67, and 154 percent of the benefit you could have claimed at age 62. So by waiting until age 70, a person can turn the $2,500 into $3,100 a month.
Don’t delay past 70, however, as that’s the last year you’ll enjoy an increase.
How Long Do You Expect to Live?
Your life expectancy can also impact whether you choose to take early Social Security. As a rule, a person must live ten to twelve years from commencing benefits to break even.
So if someone waits until 70 to take benefits but passes away at 72, they’re not going to break even. They would have been better off taking early Social Security at 62.
In contrast, say a person waits until 66 to take full benefits and then lives until age 78. They made the right decision and received more money in the long run.
Since life expectancy at age 70 is 14.3 years for men and 16.44 for women, on average, there is usually value in waiting. However, if you are facing health problems or have reason to believe you will have a lower than average life expectancy, it can make sense to take early Social Security.
Get the Right Advice
Everyone’s situation is different, and it can be wise to seek advice.
However, don’t rely on the helpful person at the Social Security Administration to assist in this decision. That is not their job. They are not trained to give advice.
That said, they are human, and it’s a human impulse to help. In their attempt to be helpful, they may accidentally give you bad advice. An Inspector General’s investigation found that widows were claiming the wrong benefit 80 percent of the time!
So if you need help, seek out a financial advisor instead. They can help you make the right decision for you.
There is no one right answer to whether you should take Social Security early, but by thinking about how much you need it and how long you expect to live, you can make a decision that works for you.
For more advice on Social Security, you can find Keep It Simple, Make It Big on Amazon.
Michael Lynch is a Certified Financial Planner with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton CT 06484 CRN202210-272648