Thursday, October 11, 2012

4 Reasons to Start Getting Social Security as Soon as You Can

     Most financial experts tell you to wait at least until full retirement age, and maybe longer, before signing up for Social Security. There's a good reason for this. Social Security is like an annuity, providing a guaranteed monthly payment for the rest of your life, no matter how long you live. It addresses the problem of:  What do I do if I run out of money? With Social Security, you never run out of money.

     For many of us – people born between 1943 and 1954 – our regular retirement is 66. We're eligible to start receiving Social Security as early as age 62. But if we do, we suffer a penalty. Anyone can also delay taking Social Security until age 70. Then you get a bonus.

     The penalty for taking Social Security early is a little over 7 percent a year, and the bonus for delaying is also slightly over 7 percent a year. So for example, if your normal retirement benefit at age 66 is calculated at the average of $1,236 a month, you'll only receive about 1,150 per month if you sign up at age 65, and barely $900 a month if you begin payments at 62. If you wait until 67, your benefit will grow to about $1,320 per month. And if you wait until age 70, your monthly benefit will balloon to more than $1,600 a month – for the rest of your life, even if you live to a hundred.

     For most people this is a good deal – a 7 percent increase each year, risk free. Compare that return to the risk-free rate on a bank CD or a U.S. Treasury bill of less than 1 percent.

     So why would anyone grab Social Security when it's first offered? I can see four good reasons.

     You need the money. Sure, you get a 7 percent return on Social Security if you postpone your benefit. But that only helps if you can afford to wait. It's kind of like putting money in a good, high-paying savings account. But if you need Social Security to cover your rent and buy groceries, then it makes sense to start benefits at age 62. You need it; you've earned it; and it's available.

     And by the way, you have plenty of company. The majority of people eligible for Social Security start drawing benefits before full retirement age.

     You're in poor health. A friend of mine just turned 60. He has diabetes. He's got high blood pressure, high cholesterol, and he's already had one heart attack. He realizes he probably will not survive to age 83, which is the life expectancy of the typical 60 year old male. (The average 60-year-old woman will make it to 85). So he intends to start Social Security as soon as he can, at age 62.

     Unfortunately, he's betting against his own longevity, but given his medical history, he's probably making the smart move. If, for whatever reason, you don't expect to live into your 80s and 90s, then it makes no sense to delay receiving your retirement benefits.

     You're a financial genius. You don't have to prove any "need" to collect Social Security, you don't even have to be retired. It is perfectly legal to start benefits at age 62, then just stash the money away in your own private investment account.

     For most people this doesn't make sense, because remember, you get a risk-free 7 percent return from the government, and you probably can't do that well by yourself. But if you're the next Warren Buffett, or have a sure-fire investment opportunity that will produce over 7 percent a year, there's a case for taking Social Security now, and investing it on your own instead of letting the government do it for you. Remember, though, you might have to pay income tax on that benefit if you're still working or if you have too much other income.

     If benefits change. Social Security is billed as a certain benefit, safely put away in a proverbial "lock box," safe and secure for our old age. But of course we all know this isn't true. Social Security was put in place by the politicians of the 20th century. Future benefits depend on the politicians of the 21st century.

     In recent years economists and politicians have begun to worry that we can't afford all the payments promised to future beneficiaries, especially as Baby Boomers retire. There's nothing, other than political pressure, to stop Congress from "bending the curve" toward lower benefits – or more likely, to tax away your benefit, especially if you're affluent enough to postpone your payout beyond normal retirement age. If in your judgment the political risk of a lower benefit outweighs that built-in "risk free" 7 percent return, then it may make sense to take the money while it's still available. But again, remember that benefits are subject to taxation if you're below full retirement age and still working.

     The decision of when to begin Social Security benefits always depends on your individual situation. I've posted two previous items which look at other aspects of the issue:  Should You Take Social Security Early? and The Best Time to Start Social Security. And you may have your own story which affects when you did, or when you will, sign up for Social Security.

     Meanwhile, the Social Security Administration helps us all out with a retirement planner, which includes a link to your own personal account, and also offers its own page When To Start Receiving Benefits. Go take a look. Then you be the judge.


rosaria williams said...

Excellent points! My husband took his at 62 precisely because his health was precarious!~

Olga said...

Social security was a major decision point. Now, I just got my first notice from my health insurance with a comparison to Medicare Part D regarding prescriptions. That really made me shake and moan. That decision is coming soon. There is information out there, but it seems to me it is all about gambling on your good health or your bad health. I do not like to gamble, but I don't like to stick my head in the sand either.

Dick Klade said...

Years back when I retired many financial advisers said take it at 62. That was because cost of living increases, which were annual events, compounded to make up for much of that 7 percent gap you describe.

We learned during the Great Recession that annual COLAs are not guaranteed. And now, there's strong talk of adopting a different method of calculating COLAs, which would reduce them.

The decision gets more and more difficult.

Stephen Hayes said...

Mrs. C. and I are discussing what to do with our Social Security and your useful information packed post comes at a good time. Thanks.

Mac n' Janet said...

Another reason to take it early, if you have another pension (state or government) that reduces your SS, then take the SS to pay your Medicar.

Bob Lowry said...

I have decided to start taking my payments at 64. If I wait until 66 the difference is about $220 a month. To leave almost $46,000 on the table for two years when SS for me is very helpful but not essential doesn't strike me as wise. After all, it would take 18 years just to make up that "lost" money.

Douglas said...

I took it at 62 rather than wait till I was 66. Yes, it meant a lower payment. But the extra 4 years of payments makes up for that. I am fortunate that I have a pension and savings. It's a very individual decision and should be made very carefully.

Snowbrush said...

I enjoyed this post--thanks. I started at 62 because of your last point about not trusting that the same benefits will be there later. I don't trust anything to be there later. No much of anything would surprise since I have no faith in our government to handle our financial appropriately.

schmidleysscribblins, said...

Before I retired, I calculated how long I would have to live to reach the break-even point with SS and my annuities. I figure it is age 78 for me, but it differs from person to person. If you have to retire the exercise is moot. Dianne

Stellamarina said...

Another reason to take it early is if the amount of your retirement payment will be less than half of your spouse. You retire at 62 and get the low amount on your work history and then when your spouce retires and get his large payment you change to the higher payment equal to half of his.

Anonymous said...

If you take reduced benefits at 62 your later spousal benefit is not half of your spouse but also reduced due to your starting at 62.

Alex in Virginia said...

My reasoning was the same as Bob LOwry's and Douglas's. I don't need the Soc Sec money now, but it makes more sense to pocket 2 years' worth of benefits and save them or invest them, than to wait to full retirement age because it would take so so many years to "get back to even" with the cummulative early-retirement payout.

Anonymous said...

The best time to take Social Security is when you are 50. Get SSDI if you have a disability and are 50 or older. Remember the good old days when you could retire early at 55? Those days are gone, but happy days are here again.

Chip Cayer said...

What these articles never tell you, is that you pass up THOUSANDS of dollars in payments by waiting. Then, when you start collecting the higher amount, it takes you until approximately age 81 to break even. If you know you'll live past that age, then by all means, wait!