Retiring Early: How Long Should You Wait?

By George D. Lambert AAA

Everyone dreams of retiring earlier and being able to live longer to enjoy it. Well, you no longer need to dream about it. The cut-off age of 65 need not apply according to a Bureau of Labor Statistics study entitled, "Trends In Retirement Age By Sex, 1950-2005" (2006). The study found that the age of final retirement has fallen around six years for both men and women since mid-century - and this trend is expected to continue. However, Social Security benefits are not paying out fully at the same falling age rate. In fact, they are increasing the age limit to receive full benefits. In this article we'll show you how to make the most of your working years and how to make sure your Social Security benefits meet up with you at retirement.

Longer Lifespan
According to the Centers for Disease Control estimates, as of 2007, the average American's life expectancy was 77.9 years. This number has climbed every year it has been recorded since 1900, and has increased by seven years since 1969. Employers have taken note of the above statistics and estimates, which partly accounts for the steep decline in defined-benefit plans and the increase in defined-contribution plans as shown in the following Bureau of Labor Statistics.

This means that many workers may not have the guaranteed stream of income that previous retirees enjoyed. (For further reading, see Determining Your Post Work Income and The Demise Of The Defined-Benefit Plan.)

Social Security Administration Responds
The original Social Security Act of 1935 set the minimum age for receiving full retirement benefits at 65. Congress, however, changed this after discovering improvements in the health of older people and increases in average life expectancy.

The 1983 amendments phased in a gradual increase in the age for collecting full Social Security retirement benefits from 65 to 67 while reducing the percentage of benefits available at age 62.

Year of Birth Full Retirement Age Age 62 Reduction Months Total % Reduction
1937 or earlier 65 36 20.00
1938 65 and 2 months 38 20.83
1939 65 and 4 months 40 21.67
1940 65 and 6 months 42 22.50
1941 65 and 8 months 44 23.33
1942 65 and 10 months 46 24.17
1943-1954 66 48 25.00
1955 66 and 2 months 50 25.84
1956 66 and 4 months 52 26.66
1957 66 and 6 months 54 27.50
1958 66 and 8 months 56 28.33
1959 66 and 10 months 58 29.17
1960 and later 67 60 60.00
Figure 3: A gradual increase in the age for collecting Social Security benefits
Source: http://www.ssa.gov/pressoffice/IncRetAge.html

Your Choices
You can start taking reduced Social Security retirement benefits as early as age 62. If you wait until full retirement age, you're entitled to more money each month. And when you postpone payments until age 70, your checks will be fatter yet. (To calculate your benefit estimates, go to the government's Social Security Quick Calculator.)

So where is the breakeven point? And how long would you have to live to make delaying benefits worthwhile? As a hypothetical example, let's assume that you are debating whether to take benefits at age 62 or 66 with the income options as offered above. According to the Social Security Administration, if you expect to live to at least age 78 and one month, you would be better off waiting to begin taking the benefits. If you hold off until age 70 to get the maximum benefit, uou'd have to live until age 79 plus nine months to come out ahead.

Reasons to Take Social Security Early
The most common reasons that people opt to take their Social Security benefits early include:

  • It is the only way they can afford to retire.
  • They have a short life expectancy.
  • They can receive a better return on the money by investing it themselves.
  • They want to get something from the system before it goes bankrupt.

Reasons to Delay Your Benefits
Besides the fact that you'll receive a higher income by waiting until full retirement age or later, there are two other points to consider.

Survivor Needs
Survivor benefits are based on the original Social Security recipient's benefit. Consequently, if your spouse is expected to live a long time, taking reduced benefits could affect his or her income long after you die.

Income Taxes
Tax planning is an important segment of retirement planning, but some people may not realize that Social Security income could be taxable.

To determine whether any of your benefits will be taxable, take half of your projected Social Security plus all your income from other sources, including tax-exempt interest. If you are married and file a joint return, you must combine your incomes and your Social Security. (For related reading, see The Benefits Of Having A Spouse.)

Still Can't Decide?
Suppose that you know you should hold off taking Social Security, but you still like the idea of a steady, monthly income. One strategy could be to delay the benefits and buy a term-certain, fixed immediate annuity. You'll get an income that's guaranteed by the issuing insurance company to make up for the missed Social Security checks. Then, when you turn 70, the annuity payments will stop and the Social Security payments will begin.

However, because Social Security might have cost of living adjustments (COLA), you may want to include an inflation rider within the annuity. That way you'll receive an annual increase in your annuity payments. (For more insight, see Inflation-Protected Annuities: Part Of A Solid Financial Plan and Inflation-Protected Securities - The Missing Link.)

All Things Considered
Before you make a decision as to when to begin your Social Security retirement income, there are few things you should consider. These include your:

  • Health
  • Tax status
  • Survivors' needs
  • Future income needs
  • Current income needs

Although Social Security was never meant to be a full replacement for your pre-retirement income, it can play an important part in your retirement planning and you should try to use it to your full advantage whether you retire early or not.

For more information, be sure to read our Introduction To Social Security.

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