Most financial experts tell you to wait at least until full retirement age, and maybe longer, before signing up for Social Security. There's a good reason for this. Social Security is like an annuity, providing you with a guaranteed monthly payment for the rest of your life, no matter how long you live. 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 -- our regular retirement age is 66. You're eligible to start receiving Social Security as early as age 62. But you suffer a penalty. You can also delay taking Social Security until age 70. Then you get a bonus.
The penalty for taking Social Security early is a little over 7 percent a year, and the bonus for delaying is also slightly over 7 percent a year. So for example, if your normal retirement benefit at age 66 is calculated at the average of $1,233 a month, you'll only receive about 1,150 per month if you sign up at age 65. If you wait until 67, your benefit will grow to about $1,320 per month. And if you wait until age 70, your monthly benefit will balloon by almost a third to a little over $1,600 a month -- for the rest of your life, even if you live to a hundred.
For most people this is a good deal -- a 7 percent increase each year, risk free. Compare that return to the risk-free rate on a U.S. Treasury bill of less than 1 percent.
So why would you grab your Social Security benefit 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 helps only if you can afford to wait. It's kind of like putting money in a savings account. But if you need Social Security to pay your 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, high cholesterol and he's already had one heart attack. Plus, he has diabetes. He realizes he probably will not survive to age 83, which is the life expectancy of the typical 60 year old male. (The average 60-year-old woman will make it to 85). 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 no sense to delay receiving the retirement benefits you've earned.
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 then just stash the money away 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, 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 that will produce more than 7 percent a year, then there's a case for taking Social Security now, and investing it on your own instead of letting the government do it for you. Remember, though, you might have to pay income taxes on that benefit if you're still working, or if you have too much other income.
If benefits change. Social Security is billed as a certain benefit, safely put away in a proverbial "lock box," safe and secure for our old age. But of course we all know this isn't true. Social Security was put in place by the politicians of the 20th century. Future benefits depend on the politicians of the 21st century. In recent years some economists and politicians have begun to worry that we can't afford all the payments promised to future beneficiaries, especially as Baby Boomers retire. There's nothing, other than political pressure, to stop Congress from "bending the curve" toward lower benefits -- or more likely, to tax away your benefit, especially if you're affluent enough to postpone your payout beyond normal retirement age. If, in your judgment, the political risk of a lower benefit outweighs that built-in "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 payments always 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.
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