Starting Social Security

Should You Put Off Retirement?

Should You Take Social Security at 62?

Although up to 50% of all workers start collecting social security at age 62, this is not necessarily the smartest financial choice.

Several factors come into play:

• When were you born? For baby boomers, the "normal" retirement age - the age you will be eligible for full social security benefits - is 66. If you were born after 1960 it is 67.
• Do you plan on continuing to work?
• What is your life expectancy?
• What do you project will happen to the social security system?

Age

If you start collecting social security at age 62, you will receive about 30% less than if you wait until 66.

If you are presently employed and are still making payments into the system, this percentage would change, since you would be entitled to a higher initial payment based on your extra earnings over the next four years.

The percentage is reduced somewhat each year you wait, until age 66.

If you want, you can continue to grow your benefits to age 70. At this point, you might as well start collecting, since there is presently no benefit in waiting any longer.

However, by waiting to 70, your benefits will be over twice as much as it would be at age 66.

There is one more factor to consider.

If you stopped contributing to social security at a young age or are relying on someone else's benefits, look at the cap that will be placed on your benefits.

In some cases, it makes little or no difference to start early.

Work

If you plan to continue working, you will lose one dollar for every two dollars in earnings over an annual limit, currently $12,960.

After 66, you would forfeit one dollar for every three dollars in earnings over $34,400.

You benefit is fixed at the age you start your withdrawals. So if you continue to work and pay into the system, your social security payments will not increase.

Life Expectancy

It is hard to know when you will die. Even if you are in bad health, you could live for years.

Life expectancy for males age 65 is about 17 more years. For females, it is 20.

Some experts say that your life expectancy will be close to your same sex parent. Although this may no longer be the case due to improvements in medicine and diet, you should still look at the ages of close relatives who have died.

Life expectancy plays several factors in your decision as to when to collect social security.

If you don't expect to live to 66, it makes no sense to wait. But if you think you might make it to 85 or above, it would be very costly to take early benefits.

While there are small cost of living increases every year to recipients, the amount of your monthly benefits is so reduced you wind up forfeiting close to $700,000 you would have received if you waited to age 70 to start collecting your social security benefits..

The Future of Social Security

One never knows what the government will do, but there are many projections that social security will be paying out more than it collects in 2017 and will be bankrupt in 2041, unless present laws are changed.

There are two major steps the government can take: raise taxes or lower benefits.

Some predict a generational war if social security taxes continue to increase.

My prediction is that benefits will be cut in several ways. The retirement age will raise and there will be means testing - meaning you might not get anything if you amass enough wealth.

In the meantime, taxes will continue to increase, especially the Medicare tax. Medicare will also likely to be means tested, although this might be much harder to implement given the cost of private health insurance for the elderly.

Perhaps, this will be how socialized medicine is introduced to the US.

In any event, if you are worried about the health of the social security system or are concerned about possible changes to the law within the next few years, it might make sense to start collecting now, since it is unlikely anything will be done to those already collecting under the present system.

Other Considerations

You can start you social security payments at age 62, but you will not qualify for Medicare until 65. Health insurance premiums for those four years could be very high, depending on your heath and where you live.

If you continue to work and pay into the system until age 66, under the current law, the average worker will lose - depending on income and salary increases - about $400 a month for life. This is a reduction of $81,600 for a male who lives to 82, his current life expectancy.

However, you are making a bet the current law will not change, something that seems highly unlikely if the 2008 elections go as presently predicted, with a Democratic Party sweep of government.

Conclusion

For some the decision is made for them. They are laid off and have no choice but to start taking payments early.

For the rest of us, it makes much more financial sense to wait - but you are taking a chance that the system will not remain the same when you do reach 66.

If you don't know what to do, visit the Social Security web site for help in determining what your predicted benefits will be. It would also help to consult a financial planner or an accountant if you still can't make up your mind.

Update

Kiplinger has recently written about a little known provision in the current Social Security law that allows you to repay all your contributions without interest and have your monthly payments reset.

There are a lot of issues to confront before taking such a step which are well laid out in this article.

Consult a financial advisor before taking any action.

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