It wasn’t so long ago that I admonished Jeff Reeves for wanting to retire at the ripe old age of 55. My opinion: Hold off as long as you can, continue to work, and reap the full value of your Social Security benefits when you reach full retirement age.
Well, I’ve been getting a decent amount of blowback on that opinion from readers and even friends, and that coupled with a recent article got me mulling the question “When exactly should one take Social Security benefits?”
Sorry to be so wishy-washy, but the answer is “it depends,” as this decision is a personal one that can turn on any number of dimes. To point, Kenn Tacchino — a professor of taxation and financial planning at Widener University — and wife Patricia Tacchino put together a checklist of 25 factors to consider when deciding on a retirement age.
So yes, its complicated. But we can identify a few questions that, when addressed, will help you better answer the big question.
What’s Your Full Retirement Age?
Mr. Reeves can retire anytime he wants, but for Social Security purposes, the only number that matters is 62 — that’s when payouts begin. So if you want to retire strictly on your own dime, go right ahead.
But be warned: Full retirement age is a different story. You won’t get full benefits until you reach that magical number, so you’ll want to visit the Social Security Administration to find yours. For instance, I was surprised to learn my FRA was 66 and 2 months; I always assumed the magic number was 65.
What Are the Payout Differences?
Here’s where knowing those ages makes all the difference. The SSA provides a table that shows you the reduction in monthly SSA benefits if you retire early.
For instance, if you are my age (58) and retire at 62, your monthly benefit is reduced by 25.83%. If you’re looking at $1,000 per month, it means you’ll get $741. Keep in mind this is a sliding scale: if I choose to retire at 65, my monthly benefit takes a 7.73% haircut; not nearly as bad, but still less than full value.
The good news: Once you get to full retirement age, you’ll start receiving your full benefit — so you’re not penalized forever.
Are There Further Limitations to the Payout?
Yes. If you decide to take those Social Security payments prior to FRA, your benefit is further reduced if you make more than $15,120 in wages (but just wages — not interest, dividends, pension or any other income sources). At that point, SSA will deduct $1 from your monthly payout for every $2 you make above the threshold.
Let’s use an example: If you earned $20,120 you have exceeded the threshold by $5,000. Our 2:1 ratio means you’ll be short $2,500 for the full year, or $208 per month.
But again, once you reach full retirement age, you’re golden. From the SSA:
Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings.
As Miller points out, “if you are working full time, that’s a good incentive to hold off (collecting benefits).” Agreed.
Are There Benefits to Holding Off?
Absolutely. Every year you earn wages, they’re counted toward your monthly retirement benefit calculation.
This holds in the event you take payments early (say, 62), decide to go back to work and suspend your payments, and get back into the pool at a later date, too. SSA will revisit your monthly payment since it’s now part of your wage record.
Where Do We Go From Here?
Taking SSA benefits and retiring are mutually exclusive events — you can make them happen at the same time, but you don’t have to.
If you just don’t want to work anymore (for whatever reason) and can afford to live on a diminished monthly benefit check and any other sources of income, have at it and retire early.
If you’re concerned that you won’t live long enough to enjoy another 25 years of full benefit checks along with those other sources of income? Again, bag it … retire early and take the money.
However, if you’re like me — you enjoy your job and feel like you’ve earned the full ride — hold off awhile and keep plugging away. For my money, that’s a no-lose proposition.
The decision is yours.
Marc Bastow is an Assistant Editor at InvestorPlace.com.