By Larry McClanahan, CFP®, CASL, CLU
Learn more about Larry on NerdWallet’s Ask an Advisor
You’re hearing a lot more these days about the importance of waiting to collect Social Security so that you receive a larger payout.
Those who’ve earned enough retirement credits can begin drawing social security as early as age 62. But collecting benefits before your full retirement age, or FRA—age 66 for those born between 1943 to 1954—will result in a permanent reduction in the amount you receive. And if you’re married, it could also mean less for your spouse if they survive you.
Your Social Security benefit at 62 will be only 75% of what it would’ve been at an FRA of age 66. And if you wait until age 70, it’ll be 132%—now that’s a nice “return” on your patience.
So then, why in the world would anyone draw Social Security early?
Here are five good (and not so good) reasons:
1. You need the money, and you have no other employment income or savings
That’s a tough spot to be in. Obviously, it trumps all other considerations.
2. You’re still working but not earning enough, so you need the money
Another difficult spot . . . but be aware of the earnings limits:
(a) If you collect Social Security before FRA, in 2014 you can earn up to $15,480 ($1,290 per month) without penalty. Otherwise, $1 in benefits will be withheld for every $2 in earnings above the limit.
(b) The earnings threshold is increased to $41,400 ($3,450 per month) if you retire before FRA but do reach it later in 2014. Any “excess” earnings are penalized $1 in benefits for every $3 above that limit.
3. You’re unfortunately in poor health
If you’re in poor health or have other reason to believe you won’t live to normal life expectancy, you may actually end up collecting more over your shortened lifetime by drawing early than by waiting.
But be sure you don’t just guess at it. Work with an advisor to run projections on a few different scenarios to help guide your decision.
4. You think Social Security isn’t going to be there for you (or will be reduced)
This is the “Larry, I want the bird-in-the-hand now rather than the promise of two in the bush” strategy. Essentially it’s a vote against the competence and trustworthiness of government, and I can understand that.
But while Medicare and Medicaid are out-of-control flying umbrellas, the sustainability of Social Security is very fixable. Not politically popular, but fixable. Some combination of: raise the retirement age, means-test benefits, remove the $117,000 cap (2014) on the wage base, change the cost-of-living adjustment (COLA), increase social security taxes, etc.
5. You want to invest the Social Security funds that you draw early and think you can earn a higher overall return vs. waiting
Hmmm. If your FRA is age 66 and you draw early at 62, there’s a 25% permanent reduction in benefits. But if you wait until age 70, you’ll receive a 32% enhancement. That’s a guaranteed 8% additional “return” each year from age 66 to 70, plus future cost-of-living adjustments are applied to the higher base.
You’d have to be consistently generating some stellar investment returns to beat that. And if you can, please let me in on your secret.
There absolutely are legitimate reasons to draw Social Security early, as well as some doubtful “reasons.” Be sure you’ve considered every angle to make the wisest choice for you.