Q & A: July 2016

Is There A Good Reason To Take Social Security Early?

Q:  I turn 62 this year.  My spouse is 65 and still working.  I’ve thought about delaying my Social Security benefit to let it grow, but a publication from the Social Security Administration points out that people get about the same amount of money they just receive a smaller amount for a longer period of time.  Are there valid reasons for not taking a reduced benefit now? 

A:  Financial advisors say that one of the biggest mistakes that most people make is retiring too early.  If you claim at age 62, your benefit will be permanently reduced by 25% and may leave you at risk of having an inadequate income in retirement.  But there are a few times when it makes sense to start benefits early.  Here are steps to take to help you make the right decision:

  • Calculate all available retirement income and assess adequacy.  You and your spouse need to determine income from all sources, Social Security, pensions, IRA(s), 401(k)s, real estate, other assets, and jobs, and work up a realistic retirement budget.  Don’t be tempted to assume your household budget will stay the same or go down in retirement, even if you pay off your mortgage.  If you own your own home, you will still need to budget for real estate taxes, homeowners insurance, maintenance, and over time, big expenses like painting or replacing the roof.  In addition, you need to budget a growing portion of your budget to medical expenses, which tend to grow several times faster than inflation and the Social Security cost-of-living adjustment (COLA).  Your medical costs alone are likely to take from one-third to one-half of your Social Security benefits when you retire, and can require as much as $245,000 for married couples age 65 and over, according to Fidelity Investments research on healthcare costs.
  • Do the math.  In addition to reducing your Social Security benefit, by retiring before your full retirement age, you also lose several years to build up retirement savings and instead increase the length of time you will be drawing down savings.  And if you start benefits before you and your spouse are at full retirement age (66), earnings from work could reduce some or even all of your benefit.  To add insult to injury, up to 85% of your benefits may be subject to taxation.
  • Evaluate your health.  Many people worry they will die before they get back what they would receive if they start benefits at 62.  But if you start benefits at 62, it will take about 13 years — until you are age 74 — for your monthly benefit to reach the amount you would start with at age 66 and that assumes a more typical rate of inflation than we actually had over the past seven years.  On the other hand you may find that health problems force you to stop working.  You may want to consider working part-time.  A 65-year old man can expect to live to 84, while a 65 year old woman can expect to live to 86.6, according to the Social Security Administration.
  • How much longer can you work?  Among the best reasons to start Social Security benefits prior to turning full retirement age, are the loss of a job, problems finding new employment, and the need for the money to pay for food, shelter and the basic necessities.

Plan carefully before starting benefits by basing your decisions on facts — thinking through how you would go about spending down your savings.  You can find plenty of retirement calculators online.  Here is one easy one to use:

Bankrate.com: http://www.bankrate.com/calculators/retirement/retirement-plan-calculator.aspx