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Why Would I Draw Social Security Early?

Social Security

Yesterday, I was talking with a client about my recent post on maximizing social security benefits over your lifetime (see Walking Away From $100,000). One thing led to another and I realized that a (shorter) follow-up post may be useful on why someone might want to instead draw social security early.

By way of recap, those who’ve earned enough retirement credits can begin drawing social security as early as age 62. But collecting benefits before your Full Retirement Age (FRA) will result in a permanent reduction in the amount you receive and, if married, potentially in the amount your spouse receives if s/he survives you.

So why would you do that? Here are some possible reasons depending on your circumstances:

  • You need the money and you have no other employment income or savings

That’s a tough spot to be in. Obviously it trumps all other considerations.

  • You’re still working but not earning enough, so you need the money

Another difficult spot . . . but be aware of the earnings limits: 

(1) If you collect social security before FRA, in 2014 you can earn up to $15,480 ($1,290 per month) without penalty. Otherwise, $1 in benefits will be withheld for every $2 in earnings above the limit.

(2) The earnings threshold is increased to $41,400 ($3,450 per month) if you retire before FRA but do reach it later in 2014. Any “excess” earnings are penalized $1 in benefits for every $3 above that limit.

  • You’re unfortunately in poor health

If you’re in poor health or have other reason to believe you won’t live to normal life expectancy, you may actually end up collecting more over your shortened lifetime by drawing early than waiting. But be sure you don’t just guess at it. Work with an advisor to run projections on a few different scenarios to help guide your decision.

  • You think social security isn’t going to be there for you (or will be reduced)

This is the “Larry, I want the bird-in-the-hand now rather than the promise of two in the bush” strategy. Essentially it’s a vote against the competence and trustworthiness of government, and I can understand that.

But while Medicare and Medicaid are out-of-control flying umbrellas, the sustainability of social security is very fixable. Not politically popular, but fixable. Some combination of: raise the retirement age, means-test benefits, remove the $117,000 cap (2014) on the wage base, change the cost-of-living adjustment (COLA), increase social security taxes, etc. 

I could “fix” social security in 30 minutes but, alas, nobody has appointed me benevolent autocrat to do so. 

  • You want to invest the social security funds that you draw early and think you can earn a higher overall return vs. waiting

Hmmm. If your FRA is age 66 and you draw early at 62, you’ll only receive 75% of your benefit—and that’s a permanent reduction. If you can wait until age 70 to collect, you’ll receive 132% of your full benefit. That’s a guaranteed 8% additional amount each year after 66, plus future cost-of-living adjustments are applied to the higher base.

You’d have to be consistently generating some stellar investment returns to beat that. And if you can, please let me in on your secret. 

There absolutely are legitimate reasons to draw social security early, as well as some doubtful “reasons.” Be sure you get all the information you need to make a wise decision.