Social Security - Take the Money & Run?
by Gerald Townsend
Say hello to Gerald Townsend, the new financial editor for Boom! Townsend’s goal is to help our readers “Live Smart” by providing a reliable source for financial investment information to help them make correct and safe financial planning decisions.
Townsend is the president of Townsend Asset Management Corporation and has more than thirty years of experience in accounting and personal financial advising. His professional designations include Certified Public Accountant, Certified Financial Planner and Chartered Financial Analyst. Prior to founding Townsend Asset Corp., Townsend was assistant controller and financial vice president for a multi-state manufacturer and an investment advisory firm. He has been recognized as a leader in his industry, including being named as one of the top financial advisors in the country by Money magazine.
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 A frequent question I am asked by clients nearing retirement is “When should I start receiving Social Security benefits?” My most common advice is that whenever the government informs you that it has money it wants to give you, your response should be “Thanks, I’ll take it.”
However, it makes sense to occasionally review this rule of thumb to see if it is still on target. So, let’s start by looking at the basics.
The earliest you can receive Social Security retirement benefits is age 62. There are two important things to keep in mind about this age:
• First, your benefit at age 62 is less than what your benefit would be at full retirement due both to the fact that you did not work the additional years plus the permanent benefit reduction because of early receipt.
• Second, if you begin receiving benefits at age 62, but also continue to work, your benefits will be reduced $1 for every $2 earned above a certain level ($12,480 in 2006).
If you were born between 1943 and 1954, the age 62 amount is 75% of what your benefit would be at your normal retirement age (which is age 66 for this particular group).
For most age 62 retirees, there really is no decision to make, as they need their Social Security income and cannot afford to delay its receipt to a later date. However, if your financial circumstances allow you to postpone the receipt of Social Security to your normal retirement age, is that a good financial decision?
I went on the Social Security Web site (www.ssa.gov) and used their “break-even” calculator to determine how long a person who delayed the receipt of benefits from age 62 to their normal retirement age of 66 would have to live, before the higher age 66 benefit made up for not receiving any benefits from age 62 to age 66.
The break-even age varied slightly, depending on the average earnings used, but it was always in the 76 – 77 range. Therefore, if you delay the receipt of benefits until age 66, you must live another 10 or 11 years beyond age 66 in order to make that a smart financial decision.
 So, tell me how long you will live and this becomes an easy decision!
The life expectancy for Americans at age 66 is 15.4 for males and 18.3 for females, so based on the averages, waiting to receive benefits looks OK. Looking at it another way, 2/3 of us who make it to age 66 will also make it to age 77, so the odds are in favor of waiting.
However, despite the odds being in your favor, most age 62 retirees will take the money. Why? Because there is no guarantee of making it to any “break-even” age, so my normal advice still holds.
However, if you come from a long-lived family and are willing to go with the odds, postponing the receipt of Social Security to age 66 might be, in hindsight, a wise decision. If you want to be really radical, consider postponing the receipt to age 70, and receiving an 8% per year additional credit to your Social Security benefit. In that case, your break-even age is around 80 – 82.
Gerald A. Townsend, CPA/PFS,CFP®,CFA® is President of Townsend Asset Management Corp, a registered investment advisory firm in Raleigh, NC. His email address is Gerald@AssetMgr.com. |
