Should You Plan on Signing Up for Social Security
at Age 62?

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by Chuck Yanikoski

About half of people eligible for Social Security retirement benefits sign up for them at age 62, which is the earliest eligibility age.

And why not? The money is there, so why not take it?

Many financial experts actually advise this. Many employers also encourage it by sug-gesting (even recommending) retirement at age 62. Many pension plans implicitly support it by offering retirement options that "integrate" with Social Security, by paying you a higher pension benefit until you reach age 62, then cutting back when you can start col-lecting Social Security.

The fact is, however, that for most people, it is better to wait - usually at least until the "normal" retirement age as defined by the Social Security Administration, which depend-ing on your birth year, is sometime between age 65 and age 67. If you start taking re-tirement benefits before "normal retirement age," the amount is reduced. Though you are still eligible for annual cost-of-living adjustments, your benefit continues permanently to be less than it would be if you had waited. Conversely, if you delay the start of benefits, you will get a permanent increase.

When employers and pension plans encourage you to take benefits early, they are proba-bly doing it out of lack of knowledge, or perhaps sometimes out of a desire to get older workers off the payroll. When financial professionals advise taking benefits early, it is usually because they are confident that they can earn you high investment returns, and if they could guarantee this, in fact, it would make more sense to begin at age 62. But since they can't guarantee results, and since you probably should not be investing very adven-turously once you're retired (unless you are wealthy enough not to have to worry about losses), their advice does not apply to you.

So when should you sign up for Social Security retirement benefits?

If you are thinking about the long run, the decision to wait is really a choice between get-ting bigger but fewer checks (if you start later) versus getting smaller but more checks (if you start sooner). So how do you decide? These are the issues that, in principle, affect the decision:

  • Your health: if you are unhealthy and likely to die earlier than most people your age, you should start collecting Social Security sooner. But if you have better than aver-age health for your age, you may be better off waiting.
  • Your sex: under Social Security, women get the same benefits as men (other things being equal), but women tend to live longer. Women are therefore more likely to be around to receive more checks, and so they benefit more by waiting and having those checks be bigger.
  • Your marital status: if you are married, your spouse will be eligible to receive one-half of your benefit once you retire, if that is greater than the benefit he or she would get based on his or her own earnings. If you take a reduction in Social Security by starting early, that adjustment carries forward to the benefit your spouse gets. Your spouse's benefits after your death might also be affected.
  • Your work plans: up to "normal retirement age" (as Social Security defines it), if you work while you collect Social Security, your benefits will be reduced by $1 for every $2 you earn above a certain amount ($14,160 in 2009 and 2010). The reduction is lower in the year you actually attain your "normal retirement age." After that, there is no penalty. So unless your earnings are small, you may be better off waiting to sign up for Social Security until you are done working, or until "normal retirement age," whichever comes first - though Social Security provides some degree of make-up, after normal retirement age, if you have lost benefits due to this "earnings test."
  • Your income: if you have taxable income from almost any source (not just work) above a certain amount, your Social Security benefits will be partly subject to income taxes. This dilutes the benefit of the payments you get. If your taxable income is high now but will be lower later, therefore, you may want to wait.
  • Your investment strategy: if you are a savvy investor and can reliably expect to get good returns in the future, there is an argument for signing up earlier for Social Secu-rity. But if you are like most retired people and put your money into conservative savings and investments, there is no benefit here to starting early.
  • Your cash flow situation: if are retired or retiring soon (whether by choice or not), and you are turning 62 and have no other sources of income or assets or even borrow-ing at reasonable rates that will get you through for a few years, then perhaps you have no choice but to sign up for benefits as soon as you are eligible.

Figuring out how all this works together for your situation is difficult, and you need access to some pretty sophisticated software to make the most prudent decision. And even the most "prudent" decision will often turn out not to have been the correct one - if you (and/or your spouse) live much longer or die much sooner than expected.

I hate to even suggest rules of thumb, because they so often lead people astray. But if you consider yourself to be in a typical situation, with no unusual circumstances, your starting point should be your Social Security normal retirement age - which is age 66 for people turning 62 now or anytime through 2016. And depending on which of the factors listed above apply to you, adjust from there.