By Janet L. Critchley
With the Social Security Administration pushing back the age of retirement, some of us will not be able to collect full Social Security benefits until age 67. There is also current talk in Washington about pushing the age to 69. At the moment, however, benefits can be taken as early as age 62.
Just because you can take benefits at 62 doesn’t mean you should. Monthly payments differ substantially based on when you elect to receive benefits. So, the timing of benefits is an important decision that can affect the amount of benefits you will receive for the rest of your life.
Consider Needs, Resources and Ability to Work
When you should start collecting your Social Security benefits will depend on a number of factors, including your personal and financial needs, your other retirement income resources, your health, and whether or not you will continue to work.
You have several choices regarding when to start receiving benefits: You can begin receiving benefits as early as age 62; wait until “full retirement age,” which is as late as age 67 for those born in 1960 or later; delay collecting up until age 70 (earning benefit credits of as much as 8% per year); or, collect at any age in between.
If you begin to collect benefits at the earliest available time—age 62—y our benefits will be reduced by as much as 30% depending on your age. One analysis that can be done is evaluating the tradeoff of collecting benefits for more years – for instance, if normal retirement age is 66 and you retire at age 62, you will receive an additional 48 checks – versus the cost of permanently reduced benefits. Ask a financial advisor to help you conduct an analysis to determine the break-point age to which you would need to live, where it would be better to wait until at least normal retirement age to collect.
When to Collect, and When to Wait
If your lifetime cash flow projections show that you need the income at age 62, then take it.
Even if you don’t need the income, you could take the benefits and then delay withdrawing other retirement funds, allowing them to grow for a longer period of time.
An analysis can be done factoring in alternative uses of your retirement funds that builds in various rates of return on your retirement savings. If you are not in good health and time is not on your side, you will probably want to collect benefits early.
If, on the other hand, you think you will live to or surpass your life expectancy, and you don’t need the income, you may be better off waiting until your normal retirement age or even longer to begin collecting your payments. When thinking about retirement, think for the long term, as many of us will live longer than the average life expectancy.
You can earn all you want at normal retirement age or later, and your Social Security benefits will not be reduced. However, prior to normal retirement age, income you earn may substantially reduce or eliminate your monthly benefit. So if you plan to work in retirement, it usually does not make sense to start your benefits early.
Your spouse’s benefit will also be reduced if it is based on your benefit and you decide to take it early. A non-working spouse’s benefit drops from 50% to as little as 32.5% if you start receiving benefits at age 62. Also, a spouse eligible for their own Social Security retirement benefit is entitled to the higher of their own benefit or what they could receive as a non-working spouse, but not both.
Don’t forget, regardless of when you start to collect Social Security, you should sign up for Medicare three months before reaching age 65.
Deciding on the best age to take your benefits is an important decision. Your financial advisor can help you with this evaluation.
Janet L. Critchley, CPA, PFS, MST is a financial analyst for Brinton Eaton (brintoneaton.com ) a wealth advisory firm in Madison, serving individuals and institutions throughout the U.S. She can be reached at firstname.lastname@example.org .