Most financial experts advise us to wait until full retirement age, or even longer, before we begin receiving our retirement benefit from Social Security. There are good reasons for this. Social Security is like an annuity, providing a guaranteed monthly income for the rest of your life. It addresses the problem of: What do I do if I run out of money? With Social Security, you never run out of money.
For many of us - people born between 1943 and 1954 - the regular retirement age is 66. You're eligible for Social Security as early as age 62, but you suffer a penalty if you start then. You can also delay taking benefits until 70, and then you get a bonus.
The penalty for taking Social Security early is around 7 percent a year, and the bonus for delaying is also about 7 percent a year. If your benefit at age 66 is figured at the average of $1,268 a month, then you'll only receive about $1,180 per month if you sign up at age 65. If you wait until 67, your benefit will grow to almost $1,360. And if you can delay until age 70, your monthly benefit will expand by almost a third to around $1,660 - for the rest of your life, even if you live to 100.
For most people this is a good deal. It's a 7 percent increase each year that is risk free. Compare that return to the rate on a two-year U.S. Treasury bill of less than 1 percent.
So why would you grab Social Security when it's first offered? There are four good reasons:
You need the money. Sure, you get a 7 percent return on Social Security if you postpone your benefit, but that only helps if you can afford to wait. It's like putting money into a savings account. But if you need Social Security to pay rent and buy groceries, then go ahead and start benefits at age 62. You've earned it, you need it and it's available. And by the way, you have plenty of company. The majority of people eligible for Social Security start drawing benefits before full retirement age.
You're in poor health. A friend of mine just turned 60. He's got high blood pressure and has already suffered one heart attack. Plus, he has diabetes. He realizes he probably will not survive to age 83, the life expectancy of a typical 60-year-old male. So he intends to start Social Security as soon as he can, at age 62. Unfortunately, he's betting against his own longevity, but given his medical history, he's making the smart move. If, for whatever reason, you don't expect to live into your 80s and 90s, then it makes sense to start your benefits at a younger age.
You're a financial genius. You don't have to prove any need to collect Social Security. You don't even have to be retired. It is perfectly legal to start benefits at age 62 and stash the money in your own private investment account. For most people, this doesn't make sense, because remember, you're getting a risk-free 7 percent return from the government for waiting, and you probably can't do that well by yourself. But if you're the next Warren Buffett, or have a sure-fire investment opportunity, then there's a case for taking Social Security early and investing it on your own. Remember, though, you may have to pay income tax on your benefit if you're still working or if you have other income.
If benefits change. Social Security is billed as a certain benefit for our old age, safely put away in the proverbial "lock box." But this isn't really true. Social Security was put in place by politicians of the 20th century. Future benefits depend on politicians of the 21st century. In recent years economists have begun to worry that the government can't afford all the payments promised to future beneficiaries, particularly as baby boomers retire. There's nothing, other than political pressure, to stop Congress from "bending the curve" toward lower benefits, or more likely, taxing away benefits from people affluent enough to postpone their payouts. If, in your judgment, the political risk of a lower benefit outweighs the "risk-free" 7 percent return, then it may make sense to take the money while it's still available. But again, remember that benefits are subject to taxation if you're below full retirement age and still working.
The decision of when to begin Social Security depends on your individual situation. The Social Security Administration helps us out with a retirement planner, which includes a link to your own personal account. Go take a look. Then you be the judge.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.