Clients can receive Social Security benefits as early as age 62, but starting then triggers one or two drawbacks.
For one, starting at 62 causes a permanent 25% decrease in monthly benefits. A client who would receive, say, $2,400 a month at age 66 (now full retirement age) would receive only $1,800 a month, before any cost-of-living adjustments.
In addition, clients with substantial earned income will see their Social Security checks reduced. This year, early starters will lose $1 of benefits for every $2 of earned income over $15,720. A client with $50,000 of earnings, for example, would lose $17,140 of benefits in 2015 while one earning $64,000 wouldn’t get anything from Social Security, even if he or she would qualify for the maximum age-62 benefit. (Withheld benefits will be restored gradually in subsequent years.)
Assuming no earnings-based reduction, clients who start at 62 will pocket thousands of dollars from Social Security each year, giving them a head start on clients who wait.
Nevertheless, "We've found the present value of the numerous options are all very similar around a client's life expectancy," says Brandon Jones, a senior wealth manager at Accredited Investors, a fee-only planning firm in Edina, Minn. "You will see a large difference if you assume an early death or live very long."
According to Jones, some clients choose to take benefits at age 62 after reviewing those numbers. "We are often comfortable with this choice," he says, "knowing the client will likely not be significantly worse off for choosing to begin benefits early. Plus, this may give clients the comfort to do the things they want to do while still relatively young and active."
Christopher Parr, CEO and president of Parr Financial Solutions, a fee-only wealth management firm in Columbia, Md., asserts that starting at 62 can be a good choice when cash flow is deficient and supplementary sources are not available or anticipated.
"In addition," he says, "starting as early as possible can make sense for someone whose health is relatively poor, with life expectancy significantly below the remaining years on actuarial tables."
Parr adds that starting at 62 can work for someone who lacks confidence in the U.S. government making good on promised Social Security benefits. "That person's attitude might be, 'I've paid into the system all these years and I want as much out of it as I can get before it goes bankrupt.'"
Starting early may also enable married clients to benefit from claiming strategies. For dual-earning couples, Jones reports that his firm often recommends that Spouse A begins taking Social Security retirement benefits between age 62 and 66. "Then, when Spouse B reaches full retirement age, Spouse B files for only a spousal benefit," he says.
"This allows Spouse B's own benefit to continue to grow until age 70. This way, the couple is able to receive spousal benefits for a period of time without impacting Spouse B's ability to eventually receive higher age-70 benefits based on his or her own earnings record.”
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
This story is part of a 30-day series on Social Security and retirement income strategies.
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