Dilemma: Take Social Security at 62 or 66?

The answer to this question, whether to take Social Security at 62 or 66, is terribly misunderstood by the public, the general media, and even by many financial advisors.  So, what is the appropriate answer?  It depends on your assumptions

Let me illustrate with a very basic case.  Suppose a single male is turning 62, and he no longer desires to work.  He has been told that, if he takes SS at 62, he will get an annual benefit of $20,000, but if he starts collecting at 66, he will receive $25,000 per year.  Assuming he has a life expectancy equal to what the IRS believes he will enjoy, which offer is a better deal?  If he has the cash flow for his living expenses, IT DOES NOT MATTER.  Whether he takes it at 62 or 66, he will receive the same amount in lifetime benefits.

If the total amount of the payout is the same, which is the better choice?  We can only provide the answer to that question if we know how long our theoretical male will live.  Social Security estimates longevity, and that is one of the variables used to pay a benefit.  If he lives longer than expected, he should take the higher payout at 66, because he will be getting $5,000 each year beyond his life expectancy. The longer he lives, the better the decision to postpone taking SS benefit until age 66.

However, keep in mind that 50% of people WON’T live as long as predicted.  Therefore, if an individual chooses to begin receiving benefits at 66, and he dies before he is expected to, he will end up getting LESS than he would if he had chosen to start taking benefits at 62.  The closer he dies to age 62, the greater the advantage of taking the money early rather than waiting until 66—if for no other reason than that he may never make it to 66!

Under these simple assumptions, whether to take SS at 62 or 66 depends on accurately predicting when you will die.
Now, let’s complicate this dilemma a bit more.  Let’s suppose this male is actually married to a woman his age, and let’s assume that his wife never worked or worked for only a few years.  In that case, she will get 50% of his benefit when she reaches retirement age, but at his death she will step up and receive his full benefit.  In this case, does it matter whether he chooses to take SS at 62 or 66, assuming they both die when the IRS expects them to?  Yes, it does matter, because women, in general, live a few years longer than men.  So, her total payout will be higher if he waits to begin taking it at age 66, because, instead of receiving $20,000 per year, she will receive $25,000 for a few additional years.  She will get a bigger payout than SS had planned for.  This is one of the reasons why SS is going broke, and quickly.

Another often misunderstood issue involves “losing” benefits if you begin collecting SS at 62, and you continue working.  The rule says that for every $2 you make above a threshold of about $14,000, you “lose” $1 in SS benefits.  NOT TRUE.  Benefits are withheld, not lost, and will be returned to you when you reach your full retirement age.  At that time, SS will pay you a higher monthly benefit amount than would otherwise have been the case, because they also reimburse you for the benefits they withheld when you continued to work and draw SS.  In other words, if you would like to work and earn more than the exempt amount, you should know that it will not, on average, reduce the total value of lifetime benefits you receive from Social Security.  Working will only increase benefits.

In general, when to begin drawing Social Security is a highly complex question involving many variables, some of which are very difficult to accurately predict, such as how long you or your spouse will live.  I hope this article has helped you gain a better understanding of how SS works, in order to aid you in your own decision making.

When will you begin drawing your SS?  In my particular case, I should  wait until age 66, because my wife is about six years younger than me, so it is reasonable to assume that she will outlive me by 10 or 12 years.  In my case, waiting until 66 will result in a higher lifetime benefit for her.  In other words, out of love, I will postpone drawing my SS, so she will receive more when I am not around.  No wonder my mother in law thinks highly of me!

And by the way . . . If you have a friend who is about to retire, and has questions regarding how to manage their finances, please have them call or email me.  I can show him/her how to maintain their lifestyle and financial security throughout retirement.