Since its inception during the Great Depression, Social Security has grown to become a primary source of income for retirees in America. After 40 quarters of contributions, those who stop working are eligible to receive retirement and/or disability income and also a small death benefit. However, the question of when to begin drawing this income is not always easy to answer. There are several factors that must be taken into account for this issue, and the right answer will vary from one person to another depending upon their circumstances.
The central issue that must be considered when trying to decide whether to begin drawing Social Security is whether one will come out the furthest ahead by drawing benefits early, at full retirement age or later. And several further variables must be considered when trying to answer this question, such as the worker’s level of earnings from age 60 to 70 and their life expectancy. A worker with serious health problems may be wise to begin drawing benefits at age 62, so that they will have received something back from their years of contributions in the event that they die early. Conversely, those with longer life expectancies may want to hold off on starting their payout as long as possible in an effort to receive the maximum possible payout. Workers who have reached their earnings peak just before retirement can also boost their retirement income by working a little longer and waiting to take their benefits.
The Investment Option
Those who are investment savvy may come out the furthest ahead by taking benefits at age 62 and investing them prudently. Of course, the wisdom of this choice will boil down to the rate of return earned on this principal. For example, if Social Security benefits for an investing worker taken at normal retirement age are $2,000 per month, then early benefits would be $1,500 per month, as these are generally 75% of the normal amount. Therefore a worker who invests this benefit in a Roth IRA for 4 years and receives a 5% average annual return would have approximately $79,000 by age 66, the current normal age for OASDI retirement benefits. If the money in the Roth continues to grow at 5%, then $1,000 could be drawn as a tax-free distribution from the account each month to supplement the $1,500 benefit already being paid. This additional payout would last for 8 years, resulting in a total of $312,000 of retirement benefits and distributions from earnings on benefits over a 12-year period from age 62 to 74, compared to just $192,000 of full Social Security benefits paid out from age 66 to 74. Obviously, failure to achieve the rate of growth in the example shown could negate the benefit of this strategy.
The Bottom Line
Deciding when to take Social Security is one of the most important decisions that workers must make when they retire. Those who fail to plan adequately in this area may find themselves in serious financial trouble later in retirement. For more information on when you should begin taking Social Security benefits, visit the Social Security website at www.ssa.gov or consult your financial advisor.