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January 15, 2013

Why it's bad to take Social Security at age 62

As baby boomers approach their full retirement ages, they face the big question: When do I or we take Social Security?

You’re eligible for a reduced benefit at age 62 and a maximum benefit at age 70. Between these two ages lies your full retirement age (FRA), which, as a baby boomer, is either 66 or 67 or some point between those ages, depending on your year of birth.

Whatever your FRA, you are entitled to the “full” benefit you’ve earned as a result of your wage history, pretty much since you first started working or contributing to Social Security. Every year you wait after your FRA to make a claim your full benefit increases by 8% until age 70, when you can claim the maximum possible based on your work history.

Many retirees are anxious to start their Social Security benefits as soon as possible, even as early as age 62, despite the lower life-time benefit. If you are in poor health, this makes sense. But if you are healthy, you may be at risk of forfeiting tens if not hundreds of thousands of dollars in payouts over your lifetime or, more importantly, the lifetime of your spouse, whose earnings record may not be as strong as yours.

The risk of living an unexpectedly long time is called longevity risk. Put differently it is the risk of running out of money in old age. This is the retiree’s greatest nightmare.

By postponing your election for Social Security to age 70 you have decided to provide the best way known today of protecting yourself and your spouse from longevity risk. Much better than any commercial annuity product available on the market today.

But there’s another great benefit to postponing your benefit claim. The farther out you push your claim, the less in income taxes you’ll pay. This is because Social Security benefits are taxed more favorably than newly earned income and distributions from your IRA.

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