When to Take Early Social Security Benefits
You may have read other articles about taking early Social Security benefits. I certainly have, and have been disappointed to find that most ignore the more complicated aspects that are apt to be of particular interest to self employed individuals and also to those who may find themselves under employed or unable to find any employment in these difficult times.
If you are well under age 62, you may still want to read this. Laws may change before you get near to such a decision, but it never hurts to know about a possible future.
This article was written in August of 2010. If I have updated it since then, I will note that here, but even if you are reading this the very day I wrote it, things may have changed. Social Security itself is under stress from the baby boomers reaching retirement age, from the current recession and from political ideology. Laws and regulations may change.
Taxes affect everything and tax law can change also. Even if nothing has changed at all, you need to fully understand your options and their affect on your overall income. This is a very complicated subject!
Finally, this article is completely focused on U.S. Social Security.
Situations where you might consider early benefits
A person forced out of a well paying job at age 62 may have taken a new job that pays far less. If that pay is less than approximately $50,000 per year, taking early Social Security can benefit them.
The self employed, and particularly "lone wolf" self employed, may not be interested in fully retiring ever, though we may want to slow down to a greater or lesser amount as we age. Many of us are in a position to control both our working hours and our overall income, and that ability can be very useful when considering early benefits.
Due to recessionary losses, a self employed person may also find that their ability to earn may have been reduced. Again, if that has fallen below $50,000, early Social Security benefits may be helpful.
There are disadvantages to early benefits. Most of the articles you will find on line focus on those disadvantages. I'll mention them briefly here; do a Google search for "early retirement" to find more.
The main issue is that benefits at any age under your full retirement age (66 for most who would be interested in reading this in 2010) are less than they would be if you waited until that age. The simplistic analysis is to look at expected lifetime and determine which gives you more money overall. Right now the break even point is well under 80 for those of us of an age where we have this option now or will have it soon. Die early and you got more by collecting early.
It's not that easy
But that is far too simplistic. For one thing, it ignores possible benefits to a surviving spouse. Their on-going benefits will be less if they will be picking up yours instead of their own.
It also ignores the all too common situation of a person forced to consider drawing from retirement funds or taking Social Security. This could be an unemployed person under full retirement age, an under employed person or a self employed person seeing reduced business income.
Whatever the cause, the decision of drawing from investments is particularly hard right now. Your investments may have experienced recent losses - if you sell now, those losses are locked in. If you believe those investments may recover soon, taking early benefits might be wise. If you think you will be long gone before that happens or believe that the value will fall even more, it would be smarter to take from those funds.
You might be fortunate enough to have locked into some high yield investment. There was a time not so long ago when you could buy high interest rate annuities. If the rate is high enough, again it might make sense to let that grow and take early benefits instead.
Taxes have to be considered. Social Security income may or may not be taxable and, if taxable, may only be partially taxed. Withdrawals from investments may or may not be taxable also, so making these decisions can be difficult. You also need to consider inflation; more on that is below.
We need to consider the condition of reduced income. Let's say that you are 62 years old now and that your Social Security benefits at age 66 would be $2,000 a month. If you take them now, they will be reduced to $1,500 per month (25% reduction), which is $18,000 per year.
If you will earn $41,160 from a job, your benefits are reduced $1 for every $2 earned above $14,160.00. In this case, that is $27,000, so half of that is $13,500, leaving your benefit at $4,500.00. If you applied for benefits in January, you would end up getting three $1,500 payments starting in October. That makes your total income $45,660.00 ($41,160 + $4,500).
That isn't a great improvement, but it could make the difference between being able to pay for your bills and not.
At $50,160.00 of other income, you would not get any benefit. If you earned exactly $14,160, your total income would be $32,160.00.
Taxes complicate this, but if the Social Security income is taxable, only part of it will be.
Benefits can increase
More interesting is how your reduced benefits change the amount you will be entitled to at age 66. If you have not taken all that you could have, your amount will increase at that age. Under current law, the $14,160 earnings limit disappears also - you can earn any amount of money and still collect without penalty.
The formula isn't hard. Benefits are reduced 5/9 of one percent for each month of entitlement before full retirement. In the imaginary case we are considering here, you would be taking 3 months of entitlements for four years, so it is 12 months total. Multiply that by 5/9 and you get a reduction of 6.67 percent (rounded).
Therefore your $2,000 original entitlement will be reduced by a few pennies more than $133.00 - giving you $1,867.00 per month instead of the $1,500.00 you were getting previously. This is often overlooked in articles about whether or not to take early benefits.
That disregards inflation, changes to law and changes in your income. Your actual amount may be more than $1,867 because of inflation adjustments. This also does not include Medicare Part B increases, which could suck up all such adjustments and more!
Even more to consider
I hope you are starting to see that this decision is far more complex than you might think from prior reading. Moreover, many important factors are unknown and out of your control. However, there is one more little mentioned fact that needs to be mentioned: you can pay it back.
Let's imagine that at age 65 you find that your investments have recovered or that you have somehow found six figure employment again. What a shame that you took money and permanently reduced your benefit!
An Interest Free Loan
Nope. You can pay back the $18,000 (12 times $1,500) you were paid and you will then get the full amount you were originally entitled to. Effectively, you have enjoyed a tax free loan and are back to $2,000.00!
Again, it can be hard to decide if this is worth doing. What else could you do with the money? How long will your regained prosperity last? Can you now delay until age 70 and get another bump? What are the inflation, taxes and health insurance impacts?
Even a partial repayment might be valuable. Let's say you could only pay back $12,000: that would give you back approximately 4.4% of the reduction.
A lot to think about
Considering all these things and having to guess at so many factors that can change so radically is confusing. Please do remember the warning I gave at the beginning. You may very well seek professional help. If you do, be sure to mention all of these factors - do not let them brush you off with a "most people" answer. You are unique, and need answers specific to your situation.
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