Wednesday, December 15, 2010

Should You Take Social Security Early?

     American workers are eligible to start receiving Social Security payments as early as age 62. However, you're penalized for choosing this early option. The penalty is about 6 percent a year. Just how "early" you are depends on the year you were born -- because that determines what the Social Security Administration calls your "full retirement age" or "normal retirement age."

     For people born from 1943 through 1954, "full retirement age" is 66. Those of us in that cohort take a 30 percent cut if we start Social Security at age 62. For a full schedule see this Social Security site.

      For each year you delay retirement, you make an extra 6 percent -- every year for the rest of your life. That's pretty good. When was the last time you got a 6 percent raise? Or the last time you received 6 percent interest on a risk-free investment? (For comparison, the rate on a 5-year Treasury bill is less than 2 percent.) One caveat: I assume future changes in Social Security, such as extending the age for eligibility, will not affect people currently retired, or people in their 50s and 60s who are nearing retirement. But if you're in your 20s or 30s, all bets are off -- you shouldn't be reading this blog anyway!

     I can see several reasons why you would jump on Social Security when you're 62.

     1) You're in poor health and don't expect to live much beyond your full retirement age.

     2)  You hate your job so much that you're willing to quit, even though you don't have another job or other source of income, so you have to rely on Social Security to pay your bills. But you'd have to be pretty desperate to do this, since you're permanently lowering your standard of living by a substantial amount.

     3) You're trying to "game" the system by collecting payments at age 62, then planning to pay them back later on. The Social Security Administration has allowed people to do this, without penalty or interest -- in effect offering people an interest-free loan. This strikes me as a fairly complicated procedure, not to mention dangerous. What happens if you can't repay the "loan?" You're stuck with the lower payments. In any case, the Social Security Administration recently announced stricter rules covering the Social Security payback option. So this is now a moot point.

     4) Because you have to. Here are some sightings of 60 year olds who applied for Social Security early. A continuing refrain from people in this last group, people forced to start their benefits early, is that they have lost their job and have been unable to find another one, due at least in part to age discrimination.

     But that's a subject for another post.

5 comments: said...

Greetings Baby Boomer. This is a dilemma I faced a few years ago. I ended up having to take SS early owing to health issues. Cheers.

Nance said...

I put together a "foolproof" retirement plan, working for all of 2007 on it with an advisor. When the target date arrived, I was both emotionally and financially prepared...for the economy everybody thought we'd be retiring into. It was great for a whole six months.

At the point in summer of '08 when I realized that my investments were being raped, I curled into a financial fetal position. I decided to take no more income from investments, to hunker down (first in bonds, then in cash) and wait things out. I took S.S. early in order to have something coming in now and maximize the chances that I'll have enough squirreled away to pay my way until the end.

Probably not financially smart. Wait, wait...don't tell me.

I'm starting to creep carefully back into the market, but I'm a traumatized investor with an entirely different retirement from the one I'd planned for.

Nance said...

Enable that Followers widget and I'll sign up.

Sightingsat60 said...

I think my widget is working now. Pls. tell me if it's not.

Anyway, if I can get on my high horse for a second, your experience is a good example of why it's a terrible idea to replace Social Security with those individual accounts George W. Bush talked about -- and some conservatives are still trying to sell. IRAs, 401Ks and all those other personal accounts are good vehicles to supplement people's SS (although they are way too complicated and should be simplified so more people would participate). It's fine for people to gamble in the stock and bond markets with that "extra" money. But we shouldn't be forced to gamble with money required for basic needs, which is what SS is supposed to be for.

Capitalism can produce lots of riches, but can also be very unforgiving. You and I should not have to starve in our old age b/c a "foolproof" retirement plan went bad. Best of luck to you.

Kay Dennison said...

I was forced into retirement. I live in an area where we're at 12% unemployment so anyone over 50 unemployable.