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Should You Tap Social Security Benefits Early?

Social Security (SS) benefits belong to the workers who paid into the system. The United States government has given the citizens the ability to choose when they retire. Should you tap your Social Security benefits early?
In many ways, it seems like everyone would want to tap their government benefits as early as possible. So why don't they? Choosing when to retire is a very complex decision.
If you tap into your Social Security early, then your long-term benefits will be reduced. Thus, the primary issue of whether you retire early is based on balancing the benefits of getting your money as soon as possible versus the benefits of waiting to receive a larger check.

What is the Normal Retirement Age?

For years, the United States government has told us that the normal retirement age is 65. Citizens born before 1937 still have a "Normal" retirement age of 65. But, that is changing.
The official Social Security Administration (SSA) website (http://www.ssa.gov/) declares that the 1983 Social Security Amendments, have created an escalating gradient for when you can retire based on when you were born (i.e. individuals born in 1938 might have normal retirement at 65 years and 2 months.) The earliest you can retire is 62 and the latest you "should" delay retirement is 70 years old.

Why Should I Retire Early?

We all want more money in our pockets and retiring early seems to make sense. Here are just some of the most common reasons for retiring early:
  • Receive your money immediately
  • Control your worker benefits
  • Solvency of the system
  • Health problems
  • Deal with various life issues
  • Time value of money
  • Opportunity cost
More than two-thirds of eligible workers take their SS early. Americans like to have physical control over their money. This is only natural. The advantage of receiving SS early is that you have it "in-your-hands" immediately.
Some estate planners may advise you to take out the SS benefits early in order to re-invest them in stocks, bonds or real estate. If you could invest your money and make significant profits, then retiring early might make sense.
The "system solvency" and "time value of money" issues are also relevant. The fact that the government has already started to increase the age of retirement for those born after 1938 is a "red flag." Physical money in your pocket has more value than an abstract IOU.
The good news is that there is a Mulligan for "Social Security early withdrawal." If you change your mind after retiring early, you can repay the money within 12 months.

What is the Early Retirement Penalty?

The official SS website says the following: "[f]ull retirement age is the age at which a person may first become entitled to full or unreduced retirement benefits. No matter what your full retirement age (also called "normal retirement age") is, you may start receiving benefits as early as age 62 or as late as age 70." So there is a window of time in which you can retire.
The website continues: "[h]owever, if you start benefits early, your benefits are reduced a fraction of a percent for each month before your full retirement age." Your spouse's benefits also may be reduced if you retire early. Here is an example:
If you were born in 1937, your Normal Retirement Age would be 65 years old. If you choose to retire at age 62, then the government penalty is "five-ninths of 1% for each month" you retire before the normal date. Thus, 65 - 62 = 3 years or 36 months. For this example, your retirement would be reduced by 20%. Your spouse's benefit would be reduced by 25%. Plus, the government would reduce your overall benefits based on inflation.

Delay to Get Larger Check

The advantage of waiting is that you will receive a larger benefits check for the rest of your life. Everyone has a different situation, but all people should think about their life expectancy and risk management. According to the "National Center for Health Statistics," the life expectancy for American men is 75 and for American women is 81.
On average, those who retire early will see a break-even point in their mid-80's. After that, they will receive lower long-term total benefits than if they had waited.
Risk Management: Age, Taxes & Inflation
No one is guaranteed to have profitable investments. Let us start with your age - most financial analysts advise the elderly to choose safer investment choices. When you are on a fixed income, you cannot handle steep stock market losses. Your risk management strategy should be more conservative.
Next, in order to benefit in the long-term by retiring early, you must 1) earn profits, 2) outperform inflation and 3) account for taxes. If your modified adjusted gross income (MAGI) reaches a certain level, then your your SS benefits may be taxable. 

Government Benefits Calculator

If you want to crunch the numbers, then visit the official government website at (http://www.ssa.gov/) and click on the "Retirement Estimator." You could also visit the "Age Increase" page at (http://www.ssa.gov/retirement/ageincrease.htm), press the "Your full retirement age is ..." button to see when you can officially retire.
If you have ample savings, income and investments, why not delay? The SSA "credit for delaying" is 8% for every year you wait. Thus, if your "normal" retirement age is 65 and you wait until 68, then you have 3 years x 8% = 24% higher SS checks.

Customized Solution Fitting Your Life

"So, is tapping your Social Security benefits early the right plan?" It all depends on you. Risk management and health are important factors. Make the best choice so that you have enough money to enjoy your Golden Years.
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Alice Bryant's picture

Alice Bryant is the Editor of Creditnet and a personal finance expert with over a decade of experience writing about credit cards, credit scores, debt repair, and more.

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