Social Security Retirement at 62 or Wait…?

November 19, 2010 | By Steven DiGregorio

Retire Early or Not?

The thought of taking Social Security as soon as you’re eligible sure is tempting.  You’ve been paying taxes into the system for your entire working life so now you’re ready to see some results.  Certainly, your budget and your portfolio would get a boost from those guaranteed monthly checks.  Unfortunately, like most other temptations, there’s always a trade-off. In the case of Social Security, claiming your retirement benefit when you turn 62 can be a pretty costly decision.

Well, the good news is that if you’re tempted, you’ve got plenty of company.  More men and women filed for early benefits in 2009 than the previous years.  We can say the weak economy is prompting many Americans who can’t find work to replace part of their income with Social Security benefits.

But if you can afford it, waiting is often the better option. Ideally, it’s best to evaluate your decision on when to take Social Security in the context of your overall portfolio.  While most people would benefit from waiting to say to age 67, to take payments, others would risk running out of money too soon and may have fewer options.

There can also be significant costs to retiring and taking Social Security at age 62. Some are related to the rules of the program and others with retirement planning in general, so it’s important that you understand them fully.

The costs of taking Social Security early

For starters, if you take Social Security early, you will forfeit future increases in your monthly checks. Suppose you’re 62 and eligible to receive about $1,200 per month. That amount could rise to approximately $1,600 per month if you wait until your 66 to claim benefits. Claiming at 62 therefore reduces your benefit approximately 25% below your full retirement amount should you have waited. If you delay taking benefits until you are 70 the differences are even greater. Now, remember that the annual cost-of-living adjustment (COLA) on your monthly check will be based on your benefit. So if you begin Social Security at 62, like you monthly base income, your COLA will be lower too!

A similar situation ocurs should you plan to claim benefits based on your spouse’s work record, yet the negative effects could be even greater.  Once you’ve made that decision, your spouse will have to live with the lesser amount even if you predecease them and leave a survivor benefit.  Those payments will be less than they could have been, for the remainder of your spouse’s lifetime, because you took your benefits early.

You’ll also lose the opportunity to pursue a couple of sophisticated strategies involving Social Security that could be valuable to your retirement planning, but that are only available if you wait until your Full Retirement Age (FRA) to claim benefits. For instance, one retirement option is often referred to as “claim and suspend.  You can claim Social Security at your FRA, but suspend actual payments until a later date. That way, your husband or wife can draw spousal benefits immediately, while you continue working and the value of your future benefits keeps rising. This technique is especially useful if your benefits are higher than your spouse’s (because you’re older and/or a higher earner), and you’re not ready to retire yet but your spouse is. If your wife, for example, won’t qualify for substantial benefits on her own, and she is younger than full retirement age, she can still collect spousal benefits while yours are suspended – but only if you have reached FRA. Meanwhile, your future benefits continue to grow.

Another option, referred to as “claim now, claim later,” lets you claim spousal benefits now and then switch to your own benefit later. This strategy lets you keep building up delayed retirement credits of your own while you receive payments based on your spouse’s work history. This may be appealing to couples who both want to retire. Instead of the husband and wife each claiming their own benefits, though, the person with the lower benefit (lets say it’s the wife) starts collecting Social Security, and her husband claims spousal benefits—allowing his higher benefits to continue to grow. Again, though, you can only employ this strategy by waiting until you’ve reached FRA to claim your benefits.

Costs you may forget to calculate

It’s natural to want to retire as soon as you can, but it’s crucial to assess the earning and investing power you may give up if you stop working full-time to take Social Security at age 62. Most obviously, if you leave a job with good pay and benefits, it may be difficult to ever regain that level of compensation if you need to return to work later.  While you are eligible for reduced Social Security benefits at 62, you won’t be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security income!  The average cost of a health plan for a 62-year-old individual could be thousands of dollars a year, and prices are rising much faster than inflation or Social Security COLAs. Why cut your benefits permanently just to pay for health insurance?

There’s even more to the story. As you approach retirement, you’re often at the peak of your earnings, and of your ability to build retirement savings. Keep working, and you can take advantage of the chance to make “catch-up contributions” to tax-advantaged savings plans. Catch-up contributions allow you to set aside larger amounts of money for retirement. For example, the normal limit on pretax contributions to 401(k) plans is $16,500 in 2010, but if you are 50 or older, you can invest an additional $5,500. Note that these amounts are subject to cost-of-living increases.

Additionally, if you stay on the job, you can boost the primary insurance amount used by the Social Security Administration (SSA) to calculate your Social Security benefits. The SSA bases your payments on your 35 highest years of pay. So as long as your current compensation is one of your top 35 years, the benefit amount for which you will be eligible is still increasing. Delaying retirement for even a few years can substantially increase the size of your nest egg—and the chances for a successful retirement plan.

Conversely, if you stop working at 62, you will stop tax-sheltered saving and cap your Social Security benefits. You may begin to draw down your savings earlier. Some may consider buying an annuity that will provide a guaranteed income, yet because your payments will be stretched over a longer period of time, that option will actually cost more to purchase. That increases the risk that you won’t have enough assets to meet your expenses throughout retirement.

When cash is available, it’s always alluring to take the money and run. But when it comes to Social Security, this can really be a very costly decision. Draw benefits as soon as you can, and you will permanently reduce payments to you and your spouse and lose the chance to keep saving and planning in the most advantageous was as possible. It’s often better to wait, tap other savings if you need to and continue to save and prepare. Then you can maximize the Social Security benefit and fund the largest possible portion of your retirement for the rest of your life!

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Tags: financial planning, pension, retirement, retirement income, retirement plan, Retirement Planning, social security, Taxes

STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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