DOES THE EARLY BIRD GET THE WORM?
DOES THE EARLY BIRD GET THE WORM?
When people plan and invest for retirement, the decision of when
to begin taking Social Security benefits eventually comes up.
Social Security is an important source of retirement income for
many individuals and, therefore, the decision of when to take
these benefits can make a big impact on retirement income.
A retired worker who is fully insured can elect to start
receiving benefits at any time between age 62 and 65 (or even
later). Benefits can start as early as 62, but if you so elect
they are permanently reduced by 20%. Here is where the question
arises. Is it better to start taking checks at a reduced amount
or wait until Normal Retirement Age and receive full benefits?
Before addressing the inherent problems with this empirical
question, let's look at some of the factors and considerations.
The early bird who decides to get the worm first gets three
years' worth of checks -36 payments- that the sleeping bird will
never see. Thus, it will take some time for the total benefits
of the person who waits until age 65 to catch up to those of the
early collector. Further, for those born after 1937, Normal
Retirement Age is being extended. Normal Retirement Age is
currently age 65, yet due to the Social Security amendments,
full benefit age will be raised gradually in two stages until
eventually reaching 67 in 2027. Thus, the early bird will
receive even more checks than the retiree who bides his time for
full benefits.
If the early bird also did not need the benefit income and chose
to invest instead of spending the checks, the investment income
would partially offset the reduced yearly benefit as well as
extend the catch-up period for the age 65 collector. Sounds like
most people would opt to be an early bird.
There are other factors to consider (as always). Working an
extra three years will probably increase the patient retiree's
benefits. This is so because more earnings will be credited
toward the Social Security account. Chances are that old
low-earning years will be replaced in the benefit equation with
a current high credit year. These higher benefits will then
shrink the catch-up period.
Delaying retirement benefits beyond 65 until age 70 will also
increase the size of the benefit due to a credit provided by the
Social Security Administration for such patience. Further, for
those born after 1937 who choose to begin receiving benefits at
age 62, the reduction-in-benefits penalty is further stiffened
from 20% to an eventual 30% in 2022. The hare will feel the
tortoise closing even quicker.
Taxation of benefits may also enter the picture. Poor timing of
Social Security and other income may result in a good portion of
early benefits being subject to inclusion in income and
painfully taxed. On the other hand, a lower age 62 benefit may
mean that the taxpayer will not meet the "combined income"
threshold for benefits inclusion.
Empirical studies have been done which generally arrive at the
same conclusion. Early bird collectors are ahead of the game for
about 12 to 15 years and then are left behind the higher benefit
collector. Thus, where a person is in good health and foresees
another 10 + years of retirement life, it is probably better to
defer taking benefits until normal retirement age.
Of course, a universal rule for when to take benefits is
impractical. Depending upon an individual's circumstances, it
might make more sense to begin taking benefits as soon as
possible regardless of the net economic benefit in the future.
This brief article is no substitute for a careful consideration
of your unique personal situation. Before making any significant
retirement planning or tax strategy, consult your financial
planner, attorney or tax advisor, as appropriate.