When should retirees start collecting their Social Security benefits before they reach full retirement age? “If they need the money,” says Maureen Whelan, a fee-only planner with offices in Garden City, Croton on Hudson and Tarrytown, New York.
She’s not being entirely tongue-and-cheek. Whelan runs an hourly practice for clients of modest means. If they’re no longer working and don’t have sufficient income from investments to cover their living expenses, then she advises them to begin tapping Social Security in order to avoid drawing down the savings they do have.
Another reason to advise the client to begin social security before reaching the age of 66, Whelan says, is if the client has health issues that could limit his or her life expectancy. The retiree will receive a smaller monthly benefit, but holding off assumes he or she will live long enough to make up the difference.
Bob Stowe, a fee-only planner based in Plano, Texas, agrees that if circumstances dictate that someone must leave the workforce and retire before age 62, or soon thereafter, and if their retirement account is a modest one, they have limited choice in the matter. If they don’t start collecting right away, “they will either take a big cost of living hit or use up too much of their 401 (K),” he says.
Stowe, who as an hourly planner earlier in his career worked up over 200 financial plans for less affluent clients, breaks it down like this:

  • $30,000 to $40,000 is around the minimum for annual living expenses.
  • Social Security benefits for people with average earnings who begin collecting early will typically come in at around $20,000 to $25,000 per year.
  • If the client has around $200,000 in his 401 (K), (which, he notes, although modest, is still greater than today’s average retirement account) the client can make up the difference by drawing down the account.

“The rule of thumb is to delay benefits,” he acknowledges, “but the client’s cash flow won’t allow it.” In circumstances like these, he says, “cash flow is king.”
In better circumstances, if the client can wait to collect until full retirement age, or better yet until age 70, he will be much better off. The Social Security benefit increases 8% a year until age 70, and given the current market, clients won’t earn that type of return anywhere else.

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