SPOTLIGHT ON FINANCE
By Fran O’Rourke, Senior Vice President, Key Private Bank
CAPITAL DISTRICT – Are you considering early retirement? If so, you’re not alone. According to the Social Security Administration (SSA) 2014 Annual Statistical Supplement, nearly 75 percent of Americans elect to receive their Social Security benefits early.1
If you want to retire early, 62 is your magic number. It is the earliest age you can start receiving Social Security retirement benefits. However, there are major drawbacks to early retirement that you should consider. For example, if you start collecting benefits early, your monthly retirement benefit will be permanently reduced. So before you put down the tools of your trade and pick up your first Social Security check, you need to ask yourself some questions.
What will my retirement benefit be?
Your Social Security retirement benefit is based on the number of years you have worked and the amount of money you have earned. It is calculated using a formula that takes into account your 35 highest earnings years. If you earned little or nothing in several of those years—or if you left the workforce to raise a family, for instance—it may be to your advantage to work as long as possible. This will afford you the opportunity to replace a year of lower earnings with a higher one, which can help you achieve a higher retirement benefit.
If you were born between the years of 1943 to 1954, your full-benefit retirement age is 66. For those born after 1960 the full-benefit retirement age will be 67. The impact of retiring at age 62 if your full retirement age is 66 would be a 25 percent reduction in your monthly benefit check. At age 63, the monthly benefit would be about 20 percent less; at age 64, 13.3 percent less; and at age 65 about 6.7 percent less. The exact amount of the reduction will depend on the year you were born.
Given these reductions, it’s easy to question why anyone would choose to receive their Social Security benefits early. However, the reasoning lies in the length of time you receive benefits as opposed to the amount of your monthly benefit. For example, even though your monthly benefit will be 25 percent less if you choose to collect retirement benefits at age 62, you might receive the same or more total lifetime Social Security benefits as you would have if had you waited until full retirement age to start collecting benefits. That’s because even though you’ll receive less money per month, you might receive more benefit checks.
To estimate the amount of Social Security benefits you will be eligible to receive in the future under current law, based on your earnings record, you can use the SSA’s Retirement Estimator. It’s available at the SSA website at www.socialsecurity.gov. You can also sign up to view your online Social Security Statement at the SSA website. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivors, disability benefits and other information about Social Security.
It is also worth noting that you can work past your full retirement age. If you do, you can receive a higher benefit payout due to government incentives that increase your payout every month that you delay retirement up to age 70.
What is the impact of longevity?
Is it better to take reduced benefits at age 62 or full benefits later? The answer depends, in part, on how long you live. If you live longer than your `break-even age,` the overall value of your retirement benefits taken at full retirement age will begin to outweigh the value of reduced benefits taken at age 62.
In most cases your break-even age is about 12 years from your full retirement age. For example, if your full retirement age is 66 then you should reach your break-even age at 78. If you live past this age, you’ll end up with higher total lifetime benefits by waiting until full retirement age to start collecting. However, unless you’re able to invest your benefits rather than use them for living expenses, your break-even age is probably not the most important part of the equation. For many people, what really counts is how much they’ll receive each month, rather than how much they’ll accumulate over many years.
How much income will you need?
Another important thing to consider is how much retirement income you will need. This projection should be based largely on an estimate of your retirement expenses. If there is a large gap between your projected expenses and your anticipated income, waiting a few years to start collecting Social Security benefits may improve your financial outlook.
If you continue to work and wait until your full retirement age to start collecting benefits, your Social Security monthly benefit will be larger. What’s more, the longer you stay in the workforce, the greater the amount of money you will earn and have available to put into your overall retirement savings. Another plus is that Social Security’s annual cost-of-living increases are calculated using your initial year’s benefits as a base—the higher the base, the greater your annual increase.
Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.socialsecurity.gov or call (800) 772-1213 to speak with a representative. You may also call or visit your local Social Security office or talk to your financial advisor.
Fran O’Rourke is senior vice president and market manager, Key Private Bank, for Key’s Capital Region. She may be reached at either 518-257-8733 or [email protected]