Retirement at 62: Is Receiving Social Security Early Worth It?

By Dalton, Thomas M. | The CPA Journal, June 2006 | Go to article overview
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Retirement at 62: Is Receiving Social Security Early Worth It?


Dalton, Thomas M., The CPA Journal


Millions of Americans are approaching one of the most important financial decisions of their lives: to begin receiving Social security benefits at age 62, or defer those benefits until older. Retirees can receive a reduced monthly benefit at age 62, and progressively larger benefits for each month the retiree postpones benefits, up to age 70. Although many retirees don't have the financial flexibility to defer Social security benefits, those who do must compare the trade-off between receiving benefits for a greater number of years versus the cost of permanently reduced monthly benefits.

The examples provided here outline methods of analyzing the early-retirement decision. A simple analysis compares total expected lifetime benefits depending on whether a retiree chooses early retirement at age 62, normal retirement at age 66, or delayed retirement at age 70. A more realistic analysis compares retirees using early Social security benefits to defer drawing down on retirement savings, allowing those savings to build for a longer period of time.

The analyses suggest that in all cases except for those with very low expected investment returns from individual retirement savings, it is economically beneficial for retirees to take Social security benefits at age 62 and use these benefits to defer taking withdrawals from their retirement savings. Each retiree is unique, however, and all factors, including those affecting individual life expectancy, must be analyzed separately to determine the best choice.

The Retirement Decision

According to U.S. Census estimates, over 15 million people in the United States will be crossing the minimum Social security threshold, age 62, over the next five years. Many of these people will be compelled to decide whether to collect Social security benefits early or to wait until the normal retirement age.

The decision is among several options:

* Begin receiving reduced Social Security benefits at 62, or sometime between 62 and the normal retirement age;

* Wait for regular Social Security benefits at the normal retirement age; or

* Wait even longer for increased Social Security benefits by postponing benefits until after the normal retirement age. At age 70 the decision is moot, because the monthly benefit does not increase by postponing benefits any longer.

Identifying the Lucky Decision Makers

Not everyone has the flexibility to defer collecting Social security benefits. At present, a little over 72% of all beneficiaries are collecting a reduced benefit because of early retirement (see OASI Monthly Statistics, April 2005, Benefits in Current-Payment Status Table 3 at www.ssa.gov/policy/ docs/statcomps/oasdi_monthly/ 2005-03/table03.pdf). Many of these people have no choice, due to economic reasons (e.g.. they are unable to work because of health problems or can't find suitable work). People who are fortunate enough to have a choice in the matter, however, must decide whether it is more economically advantageous to collect Social security early, to collect at the normal retirement age, or to delay after the normal retirement age.

People with the flexibility to make this choice can be divided into two groups: those who will continue to work after age 62, possibly drawing additional funds from taxdeferred retirement accounts; and those who will stop working altogether, living entirely by drawing funds from another source, such as distributions from a tax-deferred retirement account after age 59$. It's important to distinguish between these two groups, because those who collect Social security benefits and continue to work before the normal retirement age lose $1 of benefits for each $2 of earnings in excess of the specified limits ($12,000 in 2005). Once a person reaches the normal retirement age, there is no loss of Social security benefits, regardless of earnings.

People who continue to work after age 62 must consider the dual downsides of receiving reduced benefits by collecting Social security before normal retirement age and also further reducing benefits by earning income over the allowable limits.

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Retirement at 62: Is Receiving Social Security Early Worth It?
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