More Americans get shortchanged by taking Social Security early

taking social security early

Each year a person waits for Social Security brings a greater risk-free return for retirement than taking the money early and investing it. Image: CC Wikimedia Commons

A growing number of Americans are choosing to take Social Security early. Some baby boomers have been forced to take Social Security early because of losing jobs and spending savings during the recession, while others are compelled to collect Social Security before the program goes bankrupt. Retirement planners say fears of Social Security bankruptcy are unfounded, and Americans who take benefits early are shortchanging themselves.

Why Americans take Social Security early

In 2009, 42 percent of 62-year-olds opted to take Social Security at the youngest age allowed, according to the Brookings Institution. That number is up from 38 percent in 2007 and continues to grow, even though waiting will increase social Security benefits by up to 8 percent each year until age 70. Some of these Social Security recipients have lost jobs and given up on finding another. Others are listening to the debate in Washington about government spending cuts that includes reducing Social Security payments and raising the retirement age. However, proposals for Social Security reform look decades into the future and don’t impact baby boomers approaching retirement age. Financial experts contend that even without changing the system Social Security benefits won’t be affected until at least 2037.

Misconceptions about taking Social Security early

Americans choosing to take Social Security early often lack an understanding about how the program works or the financial consequences. Claiming Social Security at 62 nets cuts benefits by about 25 percent for a lifetime. Some people may think that not claiming benefits at 62 means they have to wait until full retirement age (which will eventually rise to age 67 for people born after 1960) to make a claim. But after age 62, people can start claiming Social Security at the beginning of the next month, so they have 96 more chances until age 70, when benefits are maximized. Another big mistake is people underestimating their life expectancy. When social Security was founded in 1935, the average life expectancy in the U.S. was 61.5. Today Americans live to age 77 on average. By waiting until age 66 to start Social Security, a person living to age 77 will collect more money over time than someone who starts claiming benefits at age 62.

Why waiting for Social Security makes sense

Some people take Social Security early while they’re still working in order to supplement income and keep health care coverage until Medicare kicks in at age 65. But Social Security benefits collected before retirement age are cut $1 for ever $2 earned above $13,560 — effectively a 50 percent marginal tax rate on income above that point. Other people start collecting benefits early while they’re still working to invest the income for retirement a few years later. But Social Security benefits increase about 7.6 percent a year from age 62 to 70. Investments providing that rate of return with no risk do not exist. The bottom line is that it makes sense to be patient. A couple earning $100,000 a year with $500,000 in retirement savings that starts claiming at 62 can expect about $50,000 a year in Social Security payments. By waiting until age 70 if they can get nearly twice that: $96,000 a year.



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