Social Security: The compelling case against filing for early benefits
Posted on 20 January 2008
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/column/social-security-the-compelling-case-against-filing-for-early-benefits
The oldest baby boomer turned 62 this month and promptly signed up for Social Security. But it probably wasn’t a very smart financial move.
Dozens of news stories ran when Kathleen Casey-Kirschling—America’s oldest baby boomer!—-applied on January 1st to start receiving her monthly check. That’s what about half of all Americans do at 62. But for most, it’s a costly mistake that will mean foregoing thousands of dollars in lifetime benefits—in some cases, hundreds of thousands.
Here’s how it works.
You become eligible to claim benefits at age 62. But most Americans will receive larger lifetime payouts by waiting, if at all possible, until they reach age 66—or even 70.
Health is the key, because the math here all depends on how long you live.
When you file early, the U.S. Social Security Administration (SSA) reduces your benefit to avoid paying higher lifetime benefits to you than it does to someone who waits until the so-called Normal Retirement Age (NRA). Under the rules, your lifetime benefits will be reduced for most of the years you start early, based on an actuarial projection of your longevity.
Currently, the NRA is age 66 for anyone born from 1943 to 1954, and it’s slightly older for people born thereafter (a chart showing your NRA is here). Let’s say your NRA is 66 but you retired and started taking Social Security at 62. That means you retired four years early. The net effect: your benefits will be reduced permanently by a total of 25 percent.
“The benefit is forever reduced, so the longer you or
your spouse lives, the more you lose,” says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries.
If you can delay taking benefits beyond the NRA, the difference is even greater. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect: if you wait until you’re 70, your annual benefit will be 32 percent higher than it would be if you started at age 66—and in addition to the 32 percent, you also get all the cost-of-living adjustments (COLA) from the intervening years.
You’ll come out ahead so long as you—or your spouse—live past what’s called the “break-even” age. That’s the age where the total benefits paid to the patient ones start exceeding total payouts to those who take early benefits. That age, Gebhardtsbauer says, is around 80—and in the case of more than 80 percent of American couples, the husband or wife will live past that age, he says.
How does it add up to the hundreds of thousands of dollars I mentioned? It happens if you or your spouse lives many years beyond the breakeven age—and the numbers are compelling. “Say you commence taking benefits at age 62 instead of 70,” says Gebhardtsbauer. “Your total lifetime benefits would be lower by $140,000 if you or your spouse lives to age 90. And if one of you lives to age 95, your loss would be $275,000.” (The calculations assumes an average Social Security benefit of $1,000 per month)
Take a deep breath—but believe it. Remember, Ron is an actuary and works with numbers for a living.
If you’re married, it’s most beneficial for the higher-earning spouse to delay taking Social Security benefits. Typically, that’s going to be men. The men tend to die at younger ages; when that happens, a woman’s Social Security benefit will be bumped up to the spouse’s higher benefit.
For older women, that can be an important increase, since it’s a time of life when overall income can decline sharply. Social Security is the sole source of income for 42 percent of single women over the age of 62, and older single women fall into poverty at a higher rate than most demographic groups in the country. The poverty rate for elderly single women is 23 percent, compared with just 5 percent for married retired people.
Says Gebhardtsbauer: “Waiting to take benefits isn’t just good for your wallet, it’s good for the country.”
RESOURCES: RetirementRevised guide to Social Security benefits.
January 26th, 2008 at 11:50 am
Actuarial thinking is one thing but it can be beside the point when considering quality of life. Maybe you’ve calculated (correctly) that Social Security plus a pension (or 2) will be plenty for you to live on. Maybe your current means of livelihood is not your passion; maybe it is stressful and not enjoyable, and you ache to have more time to do the things you love. Maybe you have something you could sell part-time but your full-time job plus other obligations doesn’t leave enough time to grow a small business, and, if you had social Security and some part-time income, you’d be just fine finanacially and happier? Under any of these circumstances, why on earth wait to begin social Security?
January 26th, 2008 at 1:22 pm
Steve: Fair enough – There could be many reasons to start Social Security early based on lifestyle or other needs. I just think it’s important to understand the math, and the likelihood that you’re foregoing quite a bit of cash benefit over a lifetime.
Mark
March 15th, 2008 at 2:19 pm
Most of what I read is crap. In the first place, if someone waites until 65 or 66 that person will probably be dead within 20 years…particularly if a male. If he or she lives past 85 or 86, they had better have family to take them in or else they will end up in a nursing home…in which case…whatever you have in SS will go to the nursing owner…not you.
Therefore, if you take your benefits at 62 or 63, you will get less but you will get more because you will receive benefits long than if you wait until 65 or 66.
Longevity cannot be predicted but insurance companies as well as the government know full well, that the average American is usually dead, or in a nursing home by 87 or so.
So spend what you’ve earned as soon as you can because–regardless of what you will ever have–Medicare and Medicaid will have to kick in because no one can afford “Assisted Living” or a “Private Nursing Home.” Therefore, unless you can afford the beforementioned, you will get the same care no matter how much SS you will have.
The Government does not want to pay benefits any earlier than it has to so it promotes the logic that you need longer deferral for SS than is necessary.
Also, many Americans can and do work under the table well into their 70s, so additioanl monies can and are made to offset the loss at 62 or 63 Retirement Age.
Figure it out for yourselves!
March 19th, 2008 at 1:50 pm
“The benefit is forever reduced, so the longer you or your spouse lives, the more you lose,” says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries.
Uh, please ask Ron to take a look at:
http://www.retireearlyhomepage.com/SS_delay_70.html
Why you shouldn’t wait until age 70 to collect
Social Security — maximizing your SS benefit
using a Withdrawal of Application (SSA-521)
April 4th, 2008 at 4:05 pm
If you start taking SS benefits at 62, you will receive reduced benefits, but it will take 15+ years to make up the difference between taking benefits at 62 or 65 or 66. Will I still be living then? Will I still be able to live a full life by then?
I agree with taking SS benefits early and investing the $, if you don’t need them. But, with everything going up in our economy, I think most of us will need every penny.
April 13th, 2008 at 2:21 pm
Senile shopper says: “If you start taking SS benefits at 62, you will receive reduced benefits, but it will take 15+ years to make up the difference between taking benefits at 62 or 65 or 66.”
In one sense, this is true, although the present value of lifetime benefits is the same for the average person regardless of when they claim benefits (as long as it’s before 70). The actuarial adjustments are very close to neutral, even when you account for interest on the foregone benefits.
But in another sense, you don’t have to wait 15 years to get higher benefits, you get them as soon you start collecting simply because you monthly benefits are higher. Put another way, when you claim benefits isn’t simply a gamble designed to maximize what you get over your lifetime. It’s also a choice designed to give you the right amount of benefits to live on. Even if retiring at 62 maximized the PV of your lifetime benefits, if it left you with an income below the poverty line — as it would for many people — it’s probably not such a smart thing to do.
May 12th, 2008 at 5:28 am
I want early benefits.
I must to plan to get my benefits from salary and another work.
November 3rd, 2008 at 10:29 am
I understand the advice given here will cover over 90+ percent of retirees; however, my husband of 40 years is a former federal government employee who retired at 55 under the CSRS retirement plan. He will never receive Social Security benefits. We’ve been retired for 6 years, and have not only my husband’s federal retirement annuity but also have income from investments. I am taking Social Security benefits at 62 and plan to invest all the benefits I receive in the future. I believe this will put me ahead of the game no matter how long I live.
February 27th, 2009 at 2:03 am
Wake up people, in this economy, you all better take the money and run…..
Does anyone really think there will be any SOCIAL SECURITY for any of us? I say most likely no. This country is in trouble. You tell me how any of us are going to collect anything when the next generation, whom we all depend on, can’t find jobs.
We’re all in trouble. Take the money and run while you can…
March 18th, 2009 at 11:12 pm
The reality is that most Boomers born in 1946 will take SS the first year. I think will be the reality. Those who are not working by age 62 and/or will not make enough for the SS payments to be taxable would seem to have little reason to not take the new income stream. This lets them ease up drawing money from 401k and/or private accounts. Telling folks that it is best to wait to collect until later than age 623 is futile, for the most part, I think. New found money is new found money.
April 10th, 2009 at 3:16 pm
I have read all comments with interest. What I do not undertand is that if I start my SS benefits now at age 64, the cola’s each year will match what I would have started SS with at age 66. It is about 200 dollars difference. What would be the point in waiting when I will be caught up by then and receiving the same amount (or close to it) anyway? I am trying to wait until 70 and can manage on working two days a week until then (I am a nurse with a good income), but I am wondering if I should take the money and invest it?
July 26th, 2009 at 7:27 pm
My question would be. If I take social security at age 62 is there a limit to how much money I can make at my job? I have been told that The IRS limits the amount of money you can make but I don’t know what happens if you make more.
September 21st, 2009 at 1:55 pm
I am 64 years old, work full time, a job I love but pays pretty bad, plan on working as long as possible, torn between taking SS now, to avoid working a part time job,I could use some extra money to pay off some bills and save more now when I can. I keep getting different answers, just not sure what is best.
September 23rd, 2009 at 11:38 am
I was born in 1945, so my NRA is 66, I understand I can collect at 65 and still work earning as much as I can and collect full benifits. What is the truth?
November 18th, 2009 at 10:57 am
I started to collect SS at 62. My husband was put on disability at 55, 9 years earlier. He then was diagnosed with dementia from an earlier head injury. I was able to collect SS and work part-time until I had to retire just before 65 to care for my husband full time. I was able to fully fund my 401K at 20% and get us both a Roth IRA with my paycheck but did owe taxes on some of the SS. But it gave me some independence and some time away from the house while he could still care for himself. I would not have changed the way I decided to do things.
December 17th, 2009 at 8:33 pm
When I read the posts I see a lot of opinion, including uninformed fear of government, directed at others based on one’s own viewpoint and circumstances. I also see that there is ignorance of the facts regarding income offsets, taxes, etc. Listening to this chatter is necessarily confusing.
All the information one can use is presented on Social Security’s website, http://www.socialsecurity.gov. All the information one needs is there somewhere, but there is a lot of information to consider, including benefits for family members (not always spouses), survivor, and disability benefits.
There are calculators for retirement benefits, including one to show the break even point in the future for those who wish to compare different dates against each other, but necessarily expressed in current dollar amounts.
When considering the effect earnings from work on benefits, there is no limit to other earnings from work at age 65, regardless of the full (or “normal”) retirement age based on year of birth. . Each person has to weigh the relative merits of waiting or not to receive benefits. Certain percentages of Social Security benefits received are subject to income tax if total income exceeds certain levels, so delaying may have that added benefit for many.
Try it, you’ll like it: http://www.socialsecurity.gov.
May 14th, 2010 at 3:38 pm
I am 57 and unemployed, it looks like I will have to resort to signficantly lower paying job than any of my previous positions. Before I contributed the max in SS now it will not be than much. Long term what does that do to the SS caculation of benefit if the first 25 years $125-250K average, and now the positions will be under 80K if I am lucky. I will be under employed, but working?
June 22nd, 2010 at 11:52 am
One issue to consider if you take social security benefits early, is that if you are still working and collecting benefits, 85% of your social security will be taxed at your maximum rate. If you wait until you are no longer working, notonly will your ss income be 30% higher than if you had taken it at 66, but also your ss income may be tax free at this time. Better to wait if you are able to work.
July 18th, 2010 at 10:10 am
i retired from the usps under csrs
but have worked and paid ss taxes
why cant i collect
and who gets my money
September 9th, 2010 at 6:22 pm
My husband was born in December 1942. He collected at 65 plus 10months. He is still working and has no retirement. SS will be his only income when he can’t work any longer. I do not think it is right to be taxed on his SS checks, because he still works. You have been taxed all your life on this money and now he is being taxed on it again, because he chooses to keep working. How can they justify this?