There is always a lot of discussion about when someone should start taking their Social Security payments. And often times it depends on who you are talking to as to what the pro’s and cons are for the different times you are eligible. Most people know they can start taking their Social Security payments starting at age 62. But most also know that if you can wait until the next two age levels you will get considerably more from your Social Security. Clearly the government prefers people take it at 62 (all things being equal) so they don’t have to pay as much out over time. But short of that, are there any good reasons why someone would want to start taking it at the earliest available window? There are…three in particular I want to share with you to consider when evaluating when to start taking your payments.
An Example
Assume you turn 62 this year, yet your full Social Security retirement age is 67, five years from now. They have told you your benefits at age 67 amount to $1,500 per month or $18,000 a year. What happens if you wish to take Social Security now, at age 62, instead of waiting until your full retirement age of 67? At age 62 your full retirement benefit will be reduced by 70% and you will only receive $1,050 per month or $12,600 a year for the rest of your life.
Looking at these numbers, why would someone want to get $5400 less each year by taking their Social Security today instead of waiting. And remember this is for the rest of your life, there are no adjustments as you get older once you decide to start taking your benefits. Let me share with you three possible reasons why someone might want to make this decision to take less money today rather than waiting into the future.
1
There is No Other Choice
Many people today, either single or married, and are in their early 60s are struggling to make ends meet. Perhaps they are no longer employed or they are underemployed and don’t make enough monthly income to meet their expenses. Being able to get an additional $1,050 a month (as in our example above) could make a significant difference for these people. This is likely one of the major reasons why approximately 30% of all individuals in the United States have taken Social Security at age 62.
However, there is a caveat. If someone taking Social Security is still working at age 62 and they earn more than $17,640 in 2019, their Social Security will be reduced by one dollar for every dollar earned over the limit. While it is generally likely that many people taking early Social Security are also still employed, this could be a significant hit on their Social Security payments. For example, it this particular person was earning $25,000 a year and then elects to take their Social Security at 62, they would be earning over the limit by $7,360 and his or her Social Security would be reduced accordingly.
Using the numbers in our example above, the person earning $25,000 a year and taking $12,600 a year at age 62 would have his or her Social Security reduced to $5,240 a year ($12,600 - $7,360 = $5,240). While this may still be a win because they just got a yearly income increase from $25,000 a year to $30,240 a year (by adding in the extra Social Security of 25,000 plus $5,240). Also, for this particular individual, the earnings penalty disappears at age 67 and he or she can earn whatever they want and not lose any Social Security after they turn 67.
2
Due to Poor Health
There is an interesting fact many people don’t realize when it comes to Social Security. Taking Social Security at an earlier age results in an actuarial adjustment made by the Department of Social Security. This means that the reduced amount at age 62 is designed to pay out the same amount of money over the lifetime of the recipient as the full amount at age 67. This actuarial adjustment is based on inflation and some other factors and usually happens around age 76.
If someone is in poor health and does not anticipate living to age 76, it makes more sense to take the benefit earlier as the total lifetime payout will likely end up being more money than waiting until full retirement age. This is always a difficult decision but can sometimes be made easier given the particular health condition of the individual. This is definitely an area I feel you should meet with your attorney and/or accountant on to make the best decision for your own personal situation.
1
Adequate retirement income allows for investing Social Security
If you will have adequate retirement income at age 62, that is not earned income for Social Security purposes, and you have significant retirement savings, you may feel confident in fully retiring before age 62. Given this favorable retirement situation, if you were to take Social Security at age 62, it could represent extra income that you don’t need. If this is your situation, your Social Security could be invested for the future. However, one should do this knowing it will be a lesser amount than if you were to wait until Social Security full retirement at age 67. If you are able, you can invest the full retirement amount, which would be about 120% more.
One question that most ask is if it works out better to invest the reduced amount of Social Security from age 62 for the extra five years instead of waiting until age 67 and then investing the larger amount? Yes, it usually does. The extra five years of investment, compounding even at the lower monthly amount, will produce a larger benefit in future years.
For illustration purposes, let’s examine investing the 2 different sums from our example above, with a $1,050 per month payout starting at age 62 and $1,500 per month starting at age 67. Without taking into account the CPI inevitable annual increase in Social Security, the 62-year-old would have a larger monthly income at age 67 due to inflation and also have 5 years of yearly credits from earned income.
Because it is impossible to know what the annual increases in Social Security might be, we left out these variables. Without these adjustments, the investment amount after 18 years starting at age 62 until age 80 versus starting at age 67 until age 80 would an extra $58,382 at 5% APR and an additional $145,087 at 7% APR. Adjustments for inflation and work credits might reduce these differences between investing at age 62 and age 67, but as you can see it is still better to start compounding that money an extra five years earlier.
What To Do Next...
So now you know at least 3 reasons why you should consider taking out your Social Security payments sooner than later. If your situation sounds similar to any one of the 3 situations above, I would highly recommend you speak with your estate planning attorney and your accountant to see if you should be taking advantage of one of these options at age 62.
If you don’t have an attorney you feel would understand your situation, feel free to CONTACT ME and I can give you some insight and assistance to help you navigate through this for your own personal situation or the situation of one of your family members.
Even if you have made a decision one way or the other, I would ask yourself one key question, “Is your life and situation exactly the same as it was last year?” If it is, you are probably still in good shape with regard to your estate plan. If there have been any changes in your life (even minor ones), I would strongly recommend you get your personal estate plan reviewed to ensure it will do what you expect it to. Unfortunately, the majority of plans we see are not in sync with the current situation and won’t do what people expect they will do. Lower your Risk and get your plan reviewed to ensure it is going to do what you want (and hope) it will do.
I hope this has been helpful. If you do the proper work on this, I can guarantee you will have NO. MORE. TEARS. A little bit of effort here can help you sleep much better at night knowing you can take advantage of the tax opportunities that will be present and that your Estate Plan is in order with the changes that have happened in your life.