If you retire before reaching full Social Security retirement age, you must decide whether to take an early retirement benefit or wait until you can take a higher benefit at your full retirement age. This decision will depend on your personal situation at the time it must be made. By answering a few pertinent questions regarding this issue, your choice should become easier to make.
Under present Social Security law, we may retire and draw a reduced retirement benefit at age 62. Those born in 1937 or earlier who retired at age 62 received a reduced benefit that was 80% of the amount available at their full retirement age (FRA) of 65. Starting in 2000, though, the FRA for Social Security purposes changed for everyone born in 1938 or later. Those reaching age 62 this year must be age 65 and 10 months to receive a 100% benefit based on their work record. If they retire earlier than that, they will lose 0.525% of their full benefit for each month they retire before reaching their FRA. That means persons who retire at age 62 this year, or 46 months before reaching their FRA, will see a reduced benefit that's slightly over 24% of their FRA benefit. To see the monthly percentage by which your full benefit may be reduced by retiring early, find your FRA here.
Between 2000 and 2020, the full retirement age for Social Security retirement benefits will lengthen until it reaches age 67 for those born in 1960 or later. During the same period, the reduced benefit for an age-62 retirement will decline from 80% to 70% of the FRA benefit. The easiest way to see how this reduction will affect the benefit you may expect is to request a Social Security statement directly from the Social Security Administration (SSA) website. Do so, and you'll have that information via mail in two to four weeks.
Bear in mind that taking benefits at age 62 results in a permanently reduced Social Security income. After all, the checks will come to you for the rest of your life. Therefore, start collecting them at a younger age and you will receive more checks than you would have had you waited until your FRA to begin your benefits. For many, then, the question becomes one of how long it will take before total receipts from a FRA benefit exceed those from an age-62 benefit. Let's look at an example to see the impact.
Assume for a moment that I'm age 62. (That's laughable since even my 40-something-year-old daughters know I'm only 29!) Also assume that the SSA has told me that I may retire now and receive $1,137 per month, or retire at age 65 and 10 months and receive a benefit of $1,500 per month expressed in today's dollars. Ignoring inflationary increases to the Social Security benefit, by FRA I could collect $52,302 (46 months times $1,137) in early retirement benefits. By waiting until FRA, I could receive $363 more per month. Therefore, it would take me some 144 months ($52,302 divided by $363), or a little over 12 years -- when I'll be age 77 and 10 months -- before my FRA benefit would give me a greater lifetime benefit than I would get by retiring at age 62.
Note that life expectancy aside, this simple analysis ignores two significant factors. It does not consider inflationary increases to the benefit through the years nor does it account for any possible alternative use of the retirement checks, such as for investments instead of income. First, how old would I be at the break-even point if the benefit increased at an inflation rate of 2.5% annually? Second, what if I didn't need the early benefit to live on today and instead simply invested it in something that provided an effective after-tax rate of 8% until I reached full retirement age? At FRA, I could then supplement my reduced benefit by adding any needed funds from my investment account to equal the full benefit.
If my benefit increased at 2.5% annually through the years, then my FRA lifetime benefit would begin to exceed my reduced benefits exactly 10 years later, when I would be age 75 and 10 months. However, by investing the age-62 retirement checks at an 8% after-tax return until I reached FRA, I would have an after-tax stash of about $61,815 at age 65 and 10 months (my full retirement age). From that stash I could begin taking the difference between my reduced benefit (now at $1,223 per month due to inflationary increases) and the full retirement benefit I could have received ($1,615 per month) had I waited to take that income. Then, even after adjusting for potential inflationary benefit increases, my $61,815 would last some 272 months (or 22 years and eight months) before it was gone. At that time I would be 88 years and six months old. From that point onward, my lifetime benefit under Social Security would be less by taking payments at age 62.
So, which choice is better in my situation? To answer that, I have to answer some other questions. Do I need a Social Security pension at age 62? Can I live with the reduced benefit after I reach full retirement age or will I regret that choice later? Will I be alive at age 88? If my family has a history of short life expectancies, then age 62 doesn't look too bad. Alternatively, if I can expect to live into my 90s, then perhaps I'm better off waiting.
We all must all look at our own situations. I think for those who wish to be fully retired and who need the income, that reduced benefit check is the proverbial bird in the hand. No one knows how long we can draw those checks. Therefore, at least in my opinion, it just seems sensible to take them when we can. If the money isn't needed immediately, it can always be invested until it is. The investment simply lengthens the time it takes to offset the impact of receiving the early payment. I also like the idea of taking a lesser amount in early retirement to finance leisure activities while I'm still active and can enjoy them. By waiting to take a larger amount later, I may have to forgo those activities because my physical capabilities won't be as great as they were. I wanna dance while I can!
To learn how Social Security will affect your golden years, read Retirement's First Leg. And visit our Retirement center for all you need to know about quitting work for good.
Despite his tender age, Dave Braze has been drawing a Social Security retirement check for more than three years. He is a contributor to theMotley Fool Rule Your Retirementnewsletter service, and frequently answers subscribers' questions.