Should You Take Social Security Early?

SmartMoney

Leave it boomers to flout one of the long-held rules of retirement planning. Afraid lawmakers will soon lift the retirement age of Social Security or shrink benefits, many are ignoring the traditional advice of financial planners and retirement experts everywhere and taking their benefits as soon as possible. Are they right to rebel?

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The number of Americans opting to take Social Security at 62 -- currently the youngest age allowed -- is on the rise. In 2009, 42% of 62-year-olds claimed benefits, up from 38% in 2007, according to economists at the Brookings Institution in Washington, D.C. And while more recent data is not yet available, financial planners and industry experts say the ranks of early claimers are still growing. This, despite the fact that by delaying benefits individuals stand to boost their payments by 7% to 8% each year until age 70. "The mentality is that getting something now is better than nothing later," says Richard Rosso, an adviser with Charles Schwab Corp. in Houston, who says he's been "begging" many of his clients to delay claiming Social Security -- often to no avail.

While some boomers have been driven to tap Social Security early out of necessity after losing jobs or savings during the downturn, many are reacting to the growing chorus of politicians calling for Social Security reform, says Gary Burtless, an economist at the Brookings Institution. Last month, New Jersey Gov. Chris Christie urged lawmakers to increase the retirement age of Social Security, while Senators Lindsey Graham and Rand Paul have proposed reducing payments to wealthier Americans. More than half of Americans support both initiatives, as long as they take effect in the distant future, according to a new Wall Street Journal/NBC News poll. As a result of all the political rhetoric, fears about Social Security, once at a hum, "have risen to a crescendo in the last six weeks," Rosso says.

Are all those fears realistic? Most advisers and retirement planning pros say no. "It's so off the mark," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "There is no question the benefits will be paid. The worst that could happen is that the system would be able to provide only 80% of the benefits under current law." The Social Security Administration has estimated that beginning in 2037 benefits could be reduced by 22% and could continue to decline, barring any changes to the system.

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But even these shortfalls are a ways out, and do little to explain why boomers are scrambling now to claim benefits. Likewise, the proposals being floated in Washington seem to target younger generations of Americans, say advisers. "When we look at the proposals, very few would impact those in or near retirement," says Chad Terry, director of retirement solutions at the Principal Financial Group. He says longevity and inflation could be more of a risk to portfolios, but "there are some who will take it [Social Security benefit] no matter what," he says. "They feel I've contributed, I'm eligible, I'm going to take it."

Another explanation: Advisers say the average pre-retiree typically underestimates the impact of taking benefits early. For example, a top-earner retiring at 62 would get $1,803 a month. By waiting until 66, he'd increase that amount to $2,442, and delaying until 70 would bump the monthly payment to $3,256, according to Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research. Another way to look at it: someone who delays taking Social Security until 66 rather 62 will collect more money over time if they live until at least age 77.

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That could have an enormous impact on retirement income, says Christine Fahlund, senior financial planner at T. Rowe Price. She says, for example, a couple who earns $100,000 a year and has $500,000 saved could expect to receive about $50,000 a year in Social Security payments and other income if they claim at 62; that same couple would get almost twice as much a year in Social Security benefits ($96,000) if they wait until 70, says Fahlund.

In specific situations, the decision to claim does make sense, say advisers, like if you're in poor health or unemployed. Otherwise, they recommend delaying retirement (and social security payments) in order to boost their retirement savings, which likely took a serious hit during in 2008. A February report by the non-profit Employee Benefit Research Institute found that nearly half of the early boomers -- those 56 to 62 -- are at risk of not having enough retirement income for "basic" costs in retirement such as food, transportation and housing. And taking social security early won't help as much as it seems.

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