Should I start collecting social security?

Ask an Advisor is a series in which people receive complimentary, personalized feedback from a Citizens Wealth Advisor. The following financial advice is for informational purposes only and doesn’t take into account personal or financial information not submitted to the Financial Advisor.

Susan, from Pennsylvania, writes:

I recently found out I can start collecting Social Security at age 62. I happen to be less than a year away from reaching that age and I’m profoundly frustrated with my boss and my job, enough to consider early retirement. My daughter married last year and I don’t have any dependents except for my two cats. My husband passed away five years ago.

My question is this: Should I start collecting Social Security or should I wait until reaching full retirement age? Would it make much of a difference? I used all the money my husband left me to pay for the house and I don’t really have many expenses.

It’s true that you can start collecting partial Social Security at 62, but you were born in 1959, and won’t be eligible to receive full benefits until you turn 66 years and 10 months.

By retiring at 62, your benefits would be permanently reduced by 30%. If you hold off for another year, you’ll face a reduction of 20%. The closer you get to your expected retirement age, the smaller the loss.

Consider your cash needs

Susan, you should only consider early retirement if you have enough resources to compensate for the hit your Social Security benefits will take. By age 60, you should have saved at least eight times your salary. You have $223,000 [401(k) and savings account], a little over twice your yearly salary.

Even if you add your likely Social Security income if you retire at 62 (around $24,000 a year), you’ll be far from generating 70% of your salary (a standard goalpost for would-be retirees). It may be wiser to defer your retirement to a later date, or work part time until reaching your full retirement age. Your 401(k) could use some help and you can’t afford to have your Social Security take a permanent hit of 30%.

It’s common for retirees’ expenses to go through three phases: Higher spending early on, modest spending after that, and higher spending near the end of life due to medical expenses. Also, bear in mind the standard of living you hope to sustain before committing to early retirement.

Delaying Social Security can pay off over a long retirement

If you choose to retire between age 66 and 10 months (your full retirement age) and 70, you would earn a delayed retirement credit (DRC). In your case, Susan, you’re looking at 8% increases per every year you delay retirement after 67. This higher baseline would last for the rest of your retirement. After age 70, there’s no further incentive for waiting.

If you decide to wait past 65 to retire, you should sign up for Medicare anyway. Otherwise, your coverage may be delayed and cost more.

Investing your benefits

Some would-be retirees believe they could increase their earnings by claiming their Social Security benefits early and investing in stocks. But even if you’re a savvy investor, the market offers no guarantees — particularly in the short term — not to mention your returns would be taxable. Most financial advisors would be reluctant to recommend this approach, so be honest with yourself about your ability to bear the risk.

Your health: the X factor

If your health is good overall, and you believe you’ll beat the average life expectancy (81 years old for women), waiting for a larger monthly paycheck may be the smart move. If you believe the opposite is true, maybe early retirement is the right move, even with all the caveats we have listed here.

The key is to identify the break-even age, the ideal moment in time to apply for benefits in order to make the most of them. By taking your benefits at an earlier age, you receive more Social Security checks over your lifetime, assuming you reach your life expectancy. By delaying your benefits, you get fewer checks, but for a larger amount. The break-even age is the point at which you would come out ahead by delaying your Social Security benefits.

It doesn’t seem like early retirement is in the cards right now, Susan, but that doesn’t mean it won’t be in the near future. Part-time employment could be a short-term solution that may get you closer to the break-even age. One adjustment you should consider is to add to your 401(k), and perhaps move that $25,000 you have in savings for a better rate.

Also, consider downsizing: Trading your house for a one-bedroom apartment could help you make strides toward retirement. Your cats will understand.

At 61, Susan’s net worth is close to $600,000. According to the 2019 Survey of Consumer Finances, she’s in a better situation than most American households (average net worth for people between 55 and 64 years old: $213,000).

Your future can benefit from a little teamwork. Meet with a Citizens Wealth Advisor today.

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