Should you take your
Social Security retirement benefit early?
If you have Social Security retirement benefits coming, you may choose to begin receiving monthly income any time between 62 and 70 years of age. Benefits received before the normal retirement age are actuarially reduced because they will be paid out over a longer life expectancy. This “normal” retirement age is 65 for those born before 1938, 65.5 for those born from 1938 through 1942, 66 for those born from 1943 through 1954, 66.5 for those born from 1955 through 1959, and 67 for those born after 1959. The percentage of reduction for benefits taken at age 62 is on a sliding scale, ranging from 20% for those born before 1938 to 30% for those born after 1959. Benefits beginning after the normal retirement age are increased, for those who reach this age after 2007, by 2/3 of a percent per month delayed. So if you delay by 12 months, your benefit increases by 8%. At age 70, this increase stops, so there is no further incentive to delay.
If you take Social Security retirement benefits early, and receive earned income in excess of $12,960 in 2007, your retirement benefit is reduced $1 for every dollar earned in excess of $12,960. For example, if you earned $10,000 in excess of $12,960, your social security benefit would be reduced by $5,000 for the year. If you are still working and earning substantial income, it is unwise to begin receiving social security benefits. Once you reach your “normal” retirement age, you may receive your full social security benefit no matter what your earned income.
The simplest way to compare your alternatives for beginning benefits earlier or later is to calculate the “breakeven” point between two alternatives; the date at which the benefits received will be equal. This is your actuarial life expectancy. A more accurate analysis will add the assumption that money has a value over time, which can be pegged at somewhere between 3 and 5%. This will cause a delay in the “breakeven point” and tend to recommend taking money sooner, since a dollar today is worth more than a dollar at some later time.
A more realistic analysis would consider the alternate uses of your retirement assets. For example, if you have funds in a 401k, IRA or other defined contribution plan in which you have flexibility in timing withdrawals, you could take Social Security early, reducing the withdrawal of your built-up savings, or delay Social Security benefits, increasing this withdrawal.
The CPA Journal in fact ran the numbers on a person born in 1944 and retiring in 2006, using benefits calculated by the SSA tables, (see http://nysscpa.org/printversions/cpaj/2006/606/p42.htm) and the outcome was:
- If you earn returns of 8% per year in your retirement account, you will always come out ahead by starting your benefits at age 62.
- If you earn 5% per year, you come out ahead by starting your benefits at age 62, unless you live beyond age 89.
- If you earn 2% per year, you come out ahead by delaying Social Security benefits as long as possible.
Summary: In general, if you are NOT receiving over $13,000 in earned income, you should take your Social Security benefits as early as possible, IF you have a retirement nest egg that is expected to earn over 5% per year.
Aside: Since a 62 year old woman’s life expectancy is 21 years, and a man’s 18 years, it might be more advantageous to delay benefits if you are a woman.
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