Q Could you explain whether it is generally better to take Social Security benefits at 62 or wait until 65 or even 70?
When people plan and invest for retirement, the decision of when to begin taking Social Security benefits eventually arises. 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.
Here is where your 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, starting with when you actually can take full benefits depending on your age. The accompanying chart shows that the earlier one was born, the younger he or she can begin to collect full benefits (Figure 2).
As of now, the early bird who decides to get the worm first gets up to 3 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 normal retirement age to catch up to those of the early collector.
Further, for those born after 1937, normal retirement age is being extended. Normal retirement age currently is 65, but due to the Social Security amendments, full benefit age will be increased gradually in two stages, eventually reaching 67 in 2027. Thus, the early bird will receive even more checks than the retiree who bides his or her time for full benefits.
If the early bird also did not need the benefit income and chose to invest instead of spending the checks, then the investment income would partially offset the reduced yearly benefit as well as extend the catch-up period for the normal-retirement-age collector. Sounds like most people would opt to be early birds.
As always, there are other factors to consider, too. Working an extra 3 years probably will increase the patient retiree's benefit, 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 current, high-credit years. These higher benefits then will reduce the catch-up period.
Delaying retirement benefits beyond normal retirement age until age 70 also will 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 also may 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.
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