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IL Estate Planning Blog

Tuesday, November 12, 2019

3 Reasons to Take Social Security at Age 62

3 Reasons to Take Social Security at Age 62

by Thomas Day

courtesy of the National Care Planning Council

 

Assume that you are age 62 this year and your full Social Security retirement age will be 67, five years from now.  Assume the age 67 amount will be $1,500 a month or $18,000 a year.  What if you wish to take Social Security now instead of waiting until your full retirement age?  At age 62 your full retirement benefit will be reduced by 70% and you will only receive $1,050 a month or $12,600 a year for the rest of your life.  Why then would you want to take a reduced amount of Social Security for the rest of your life?  Here are three possible reasons.

 

1.  There is little other choice

2.  Due to poor health it makes sense to take it earlier

3.  Adequate retirement income allows for investing Social Security

 

1.   There is little other choice

Many people either single or married and who are in their early 60s are struggling to make ends meet.  Perhaps they are not employed or underemployed and don’t make enough monthly income.  Being able to get an additional $1,050 a month as in our example above could make a significant difference for these people.  This is likely one major reason why about 30% of all individuals in the United States have taken Social Security at age 62.

 

There is a caveat however.  If someone taking Social Security is still working at age 62, and if that person earns more than $17,640 in 2019, his or her Social Security will be reduced by one dollar for every dollar earned over the limit.  It is likely that many people taking early Social Security are also still employed.  If that person were earning $25,000 a year and then elects for age 62 Social Security, that person would be over the earnings limit by $7,360 and his his or her he Social Security would be reduced accordingly.

 

If we use the numbers in our example above, the person earning $25,000 a year and taking $12,600 a year at age 62 would have his or her Social Security reduced to $5,240 a year.  This is still a win because that person just got a yearly income increase from $25,000 a year to $30,240 a year by adding in the extra Social Security– $25,000 plus $5,240 .  Also, for this person the earnings penalty disappears at age 67 and he or she can earn whatever they want and not lose any Social Security after they turn 67.

 

2 .   Due to poor health it makes sense to take it earlier

Taking Social Security at an earlier age results in an actuarial adjustment made by the Department of Social Security.  The reduced amount at age 62 is designed to pay out the same amount of money over the lifetime of the recipient as the full amount at age 67.  Based on inflation and other factors, this is usually around age 76.

 

If someone is in poor health and does not anticipate living to age 76, it makes more sense to take the benefit earlier as the total lifetime payout will likely be more money than waiting until full retirement age.

 

3.   Adequate retirement income allows for investing Social Security

if you will have adequate retirement income at age 62 – that is not earned income for Social Security purposes – as well as significant retirement savings, you may feel confident in fully retiring before age 62.  Given this favorable retirement situation, if you were to take Social Security at age 62 that could represent extra income that you don’t need.  Social Security could be invested for the future.  But it is also a lesser amount than if you were to wait until Social Security full retirement at age 67 and invest the full retirement amount which would be about 120% more.

 

Does it work better to invest the reduced amount of Social Security from age 62 for the extra five years instead of waiting until age 67 and then investing the larger amount?  Yes, it does.  The extra five years of investment compounding, even at a the lower monthly amount, will produce a larger benefit in future years.

 

We did some analysis on investing the 2 different sums from our example – $1,050 a month starting at age 62 and $1,500 a month starting at age 67.  We did not take into account the CPI annual increase in Social Security as the 62-year-old would have a larger monthly income at age 67 due to inflation and also have 5 years of yearly credits from earned income. 

 

Because we have no idea what the annual increases in Social Security might be, we left out these variables.  Without these adjustments, the investment amount after 18 years starting at age 62 until age 80 versus starting at age 67 until age 80 would an extra $58,38.2 at 5% APR and an additional $145,087 at 7% APR.  Adjustments for inflation and work credits might reduce these differences between investing at age 62 and age 67, but we believe it is still better to start compounding that money an extra five years earlier.

 


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