Should you Start Social Security at age 62?

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Status: Finished  |  Genre: Personal Finance  |  House: Booksie Classic
This is an essay about the pros and cons of starting to receive you social security benefit at age 62 or older. I provide a chart showing how starting at different ages affects overall income.I explain some of the advantages and disadvantages of starting at different ages. I am NOT a financial adviser.

Submitted: April 25, 2014

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Submitted: April 25, 2014



Why You Should Consider Receiving Your Social Security Benefit Starting At Age 62

"At Social Security, we’re often asked, 'What is the best age to start receiving retirement benefits?' The answer is that there is no one 'best age' for everyone and, ultimately, it is your choice. You should make an informed decision about when to apply for benefits based on your individual and family circumstances."  SSA publication 055-10147 for 2014.

At the end of this essay I have printed a charts that shows how payments vary depending on the age you start collecting them. This chart and the calculations in this essay are based upon information in the above publication.  It assumes a benefit of $1,000 a month at full retirement age of 66, and my chart and examples use the same figures. 

 It is generally believed that the longer you wait to start collecting the more money you will receive.  That is only partially true. For example, a person starting at age 62 and receiving benefits for 9 full years could receive $65,160 more than someone starting at age 70 and receiving benefits for one full year, if they are both the same age and both die at age 71. How long a person lives determines how much money he will ultimately receive.  A person’s life expectancy is the crucial factor in determining what age to start receiving the benefit. I will illustrate this with two hypothetical people. I will call the person that starts collecting at age 62 John, and the one that waits until age 70 Sally. They are both the same age. If John starts collecting his benefit at age 62, it is permanently reduce by 25% to $750 a month or $9,000 a year.  If Sally waits until age 70 to start her benefit she will receive $1,320 a month at that age. That’s the downside of starting at age 62. The upside is that he collects it for 8 more years than Sally. By the age of 84 John will have received $207,000 and Sally $237,600, if they live that long. That is the catch. If John plans to retire at age 70 but dies when he is 69, he didn’t receive a penny.  He paid thousands of dollars into the system, for 40 or more years, and got nothing in return. If he and Sally live to age 79 John is ahead of Sally by $3,600. At age 80 she has collected only $3,240 more than he has. The social security administration estimates the average life expectancy for men and women after reaching the age of 65 to be 84 and 86 respectively.

Let us now consider the effects of inflation.  If John starts receiving benefits at age 62 he will have received total of $207,000 when he is 84, after receiving benefits for 23 years. The inflation rate for the previous 23 years (1991-2013) was 71%. If the same rate existed for the 23 years John collected benefits, he would have needed $353,970 to compensate for inflation. Sally received a total of $237,600 after 15 years. For the previous 15 years (1999-2013) the inflation rate was 40%. At that rate of inflation she would have needed $332,640 to compensate for inflation, a difference of $$21,330.  That averages out to $1,422 for each year she received benefits. Of course inflation rates vary, and they might be higher or lower in the next 23 years, but they are something that must be considered when deciding when to start receiving your benefit. It should also be noted that people receiving benefits receive a cost of living adjustment (COLA). This has averaged about 2.7% a year over the past 23 years. John and Sally both would have received those increases, which are not included in my chart. John would have received them for 8 more years than Sally.

If John continues to work and starts collecting benefits at age 62 there are some drawbacks. His payment will temporarily be reduced and some of it may be taxable. But the advantages might outweigh the drawbacks. Here’s how it works. From age 62 to age 65 they deduct $1 for every $2 earned above $15,480. If John’s benefit is $9,000 a year and he earns $20,000 for the year they will withhold $2,260 and he will receive $$6,740 for the year. When he reaches the full retirement age of 66, his benefit will be increased to take into account those months in which he received no benefit or a reduced benefit. Also, any wages he earns after signing up for Social Security may increase his overall average earnings, and his benefit probably will increase. If John filed a federal tax return for 2013 with $20,000 income, “single” and took the standard deduction, his tax situation would have been as follows: His annual benefit was $9,000. They withheld $2,260 of this because he went over the $15,480 threshold and gave him $6,740, which is subject to income tax. He would not have owed any tax on that amount in 2013. However, if he had an income between $25,000 and $34,000 he might have to pay income tax of up to 50% of his benefit. If it was more than $34,000 it could go as high as 85% of his benefit.

A good strategy for John might be to start receiving his benefit at age 62 and to continue to work. There are two advantages to this. Because he is earning more now than he did when he started working some 40+ years ago his “average " earnings will increase and his benefit will also increase. Also, if he places the benefit that he receives in an IRA or similar investment, the rate of return might compensate for his reduced benefit. What is more important, however, is that he will own that money. If he dies before he is 70 all of his savings will go to his heirs, not just some of it. If he is married, the amount of his social security benefit that his wife or children can receive is limited in many ways. His wife would have to be 60 to receive widow’s benefits, and there are many other restrictions regarding the amount she and his children could receive.

A person who has never been married has an easier choice. He can look at the chart provided and decide what the best age to retire is. If he has a wife and children, the situation is more complex. There are some free online calculators that can help him make the right decision. I am not a financial advisor and am not recommending any particular course of action. This information is provided for your consideration, to use or ignore. At what age you start receiving benefits is one of the more important decisions you will make during your lifetime, and should be given considerable thought.


Author's note: due to space limitations this essay is continued in book two (Should  you retire a age 62? book 2). There you will see a chart that shows how the dolar amounts shown above were determined and you will be able to use that chart to see how your Social Security benefits will be affected by the choices you make.

















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