By SUSAN CALLAHAN, Associate Editor and Featured Columnist
The raging debate over when we should claim Social Security retirement benefits seems all but over, with the majority of commentators urging all of us to wait as long as possible to claim.
Their reasoning seems persuasive. Social Security pays you about 25% less each month if you claim at age 62, considered “early”, instead of waiting until your full retirement age, now 66 for those born between 1943 and 1954. Full retirement age rises to age 67 for those born in 1960 or later.
Waiting until age 70 can increase your monthly check by even more because, after your full retirement age (again let’s assume it is 66), you will receive 8% extra for each year between 66 and 70, for a potential additional increase of 32%.
So, we’ve been told. But are there good financial reasons to take Social Security at age 62?
Here are some that may apply in your situation:
Mary and Tom are a two-earner family. They’ve had careers in several companies, as have many Americans. Mary and Tom each have pensions from their work which total $2000 per month.
Mary also has a side hobby that generates about $15,000 per year. The live frugally and have monthly household expenses of $2200.
If they collect their Social Security at age 62, Mary would get $1600 per month, the same as Tom. If they wait until age 66, they each get $2400 a month.
At age 61, both Mary and Tom are eager to retire and leave the daily grind. Should they collect Social Security next year at age 62 or wait until age 66?
Mary and Tom will come out ahead if they collect their Social Security at age 62. Here’s why.
Mary’s side hobby generates $15,000 a year. That, plus $1000 of their $2,000 per month pension, covers their household expenses. They are therefore in a position to save their Social Security checks, which will total $3200 per month.
Total Monthly Savings
-$3200 Social security
-$1000 net pension ( $2000 minus $1000 used to cover household expenses)
-$4200 monthly savings
$50,400 yearly savings (before taxes and health insurance)
In 4 years, when Mary and Tom are 65, they will be able to cut back on their health insurance outlay because they will be eligible for Medicare.
So, if we estimate their health insurance at $1000 per month, that still leaves $38,200 in savings. At age 62, they can opt for a high deductible policy to save on monthly premiums, which would cut their health insurance premiums a bit.
Those savings of $38,200 per year , invested at 8% for the 4 years between the ages of 62 and 66 would produce $185,905 in savings.
Now, let’s look at what their picture would look like if they decided to wait until age 66.
At age 66, their monthly income would look like this:
-$4800 social security
-$1250 Mary’s side income
--$8050 total monthly income
Most analysts would compare the $4800 in Social Security income at age 66 to $3200 in Social Security income at age 62.
But here's an important wrinkle. What they often overlook is that the Social Security payout at age 62 is increased by the "cost of living adjustment" (COLA). The COLA for the past 10 years has averaged 2.85%.
Sure enough, there are years when the COLA is zero. But there are also years when it is 5% or more. For example, here is the COLA history from 2005 to 2014:
Applying the average 2.85% COLA to Mary and Joe’s Social Security payout at age 62, gives them a check at age 66 of $3580.69.
So here is the side-by-side comparisons of what their financial picture will look like at age 66:
Scenario 1-take Social Security at 62
-$3580 from Social Security $4800 from S
-$2000 pensions $2000
-$1250 Mary’s side income $1250 from side income
-$6830 Total Monthly Income $8050 Monthly
Investments: $185,905 Investments: 0.00
True, Mary and Joe now would have $1220 extra monthly income had they waited ($14,640 annually). But they also wouldn’t have the investment portfolio of $185,905. Starting at age 6, it would take them 12 years and 8 months to save the extra $185,905, at which point they would be 79 years old.
If, on the other hand, they choose Scenario #1, at age 66 they will still have that hoard of cash which may keep growing at an average of 8% for those 12 years from age 66 to 78. At age 79, of they’re both lucky enough to live that long, they would have additional savings of $468,140.
That’s nearly $500,000 in additional savings which they would forego if they decide to wait until full retirement to claim Social Security. By the way, we don’t subtract any of Mary’s Social Security benefits even though she is working because her earnings --$15,000-- are under the magic limit of $15,720 for 2015. Earning above this amount would have decreased Mary’s Social Security benefits by $1 for every dollar over the $15,720 limit.
Of course, the decision of when to claim will vary depending on your circumstances. But Mary and Joe’s situation is not fictional. In fact, it matches nearly dollar-for-dollar the situation of a married couple I know.
But not many Americans are lucky enough to have pensions these days and monthly living expenses low enough to allow them to save all their Social Security checks.
What about those Americans at the other end of the spectrum, with high living expenses?
If a couple has living expenses that they cannot cover with their Social Security payouts at age 62, then they should try to wait as long as possible to maximize their Social Security checks. In the meantime, they should keep on working. In fact, they should keep working, if their health permits, even after their full retirement age of 66. After full retirement, the amount of their Social Security checks will not be decreased because of earnings from work. Before full retirement, Social Security decreases the amount of your monthly payout check by $1 for every $2 you earn in work over $15,720.