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The Pros and Cons of Taking Social Security Early

Brian O'Connell

When it comes to taking Social Security plan distributions, you do have options.

Up first is age 62 -- that's the earliest you can take money from your Social Security plan. If you cash out at 62, just know there are benefits and penalties for cashing in early on Social Security -- and the "cons" pretty much outweigh the "pros."

Data from the Center for Retirement Research at Boston College states that age 62 is the most common period to claim Social Security benefits -- 42 percent of men and 48 percent of women do so, and many for good reasons.

That was the case for Anna Renault, a Baltimore-based author and multiple cancer survivor. "I'm a retiree who accepted Social Security at age 62, and several factors determined why I did so," Renault says. "First and foremost, I have a long medical history that includes multiple bouts of cancer as well as a heart condition. I wasn't sure how long I would live."

Renault had good reason to think so -- her maternal grandparents died before age 50, and at age 59, Renault was diagnosed with breast cancer.

[See: 10 Social Security Claiming Strategies That Work.]

"Considering the fact that my health precludes me from continuing to work full time, I needed a steady income that would at least cover my major bills such as mortgage and utilities (electric, phone and water)," she says. Her Social Security check, coupled with a small pension from after a 31-year career working for the state, allowed her to live a decent lifestyle.

"Together these two incomes cover my bills with a little left for emergencies, like replacing my 28-year-old refrigerator and regular car maintenance," Renault says.

Certainly, Renault's reasoning for taking Social Security early makes sense, given her situation. But doing so comes with caveats, notes Billy Vail, a money manager with Integrity Wealth Advisors.

"Claiming Social Security at 62, in lieu of full retirement age, yields a reduction in your benefit of about 30 percent of your primary insurance amount, compared to what you would receive at full retirement age," says Vail. Full retirement is 67 for most Americans, although the exact date depends on the year you were born.

As Vail says, and according to Social Security data, taking Social Security benefits at 62 reduces one's monthly benefit income by approximately 30 percent. But taking it between ages 63 and 66 bites into potential Social Security income, too.

Benefits are reduced by the following amounts by taking Social Security early:

-- Age 63 -- approximately 25 percent

-- Age 64 -- approximately 20 percent

-- Age 65 -- approximately 13 percent

-- Age 66 -- approximately 7 percent

By and large, by taking Social Security at age 62, you're only receiving 75 percent of potential benefits. By taking out proceeds at age 70 (the oldest age you can claim Social Security benefits), you're increasing your maximum potential returns by 8 percent for every year you delay benefits, Vail says.

[Read: 6 Social Security Calculators That Can Help You Decide When to Claim.]

There are a few scenarios where it does make sense to take Social Security at age 62, and health, as Renault attests, is definitely one of them.

"The numbers will vary depending on whether you are single, married, widowed, and on when you will attain full retirement age," says Oscar Vives Ortiz, a financial planner with PNC Wealth Management in Tampa, Florida. "If married, the decision also varies depending on the difference in wages earned between the spouses over their life."

"If you are physically unable to work, and you don't have other sources of income (especially if you're single), it's a good idea to take out Social Security benefits at age 62," he says.

On the downside, a person who begins Social Security benefits at age 62 will receive 75 percent of the projected benefit he or she would receive at their full retirement age -- "and the difference in benefit is permanent," Ortiz says.

"The breakeven point, when the total dollars received by waiting to age 66 begin to exceed total dollars received by beginning at age 62, is approximately age 77," he adds. "Life expectancy tables show that a person who has attained age 62 will live to be 85.5, and a person who has attained age 66 will live to be 86.2. This means that if you have a normal life expectancy, you will end up with less dollars received."

Additionally, the difference in benefit is also compounded because future benefits grow by cost of living increases. "That means that a client beginning Social Security benefits at age 62 is also giving up COLA increases on the missing 25 percent that would be available at full retirement age," Ortiz explains.

Taking a realistic view of what you'll be doing at age 62 and age 82 should factor into the decision, too.

"A person who is retired at 62 and does not collect Social Security is going to drain their retirement assets faster," says Dennis O'Keefe, an investment advisor Successful Money Strategies in Fall River, Massachusetts. "Once they run out of assets, the only fallback position they have at 80 or 85 or 90 is that Social Security check. That's bad planning."

In addition, it is far more likely that a retiree will spend money in their 60s than their 80s, O'Keefe says. "Think of most of the 80-year-olds you see. Are they buying lots of clothes? Going on lots of trips? Eating huge meals? No. As we age, our world shrinks and our need for income shrinks with it," he adds. "Potentially giving up more income later to be able to spend that money early in retirement is a massive issue that few new retirees consider because every article you read is about waiting until 70 to collect your [Social Security]."

Deciding to take Social Security early is an experience that carries both a financial and emotional burden, so don't take it lightly. Talk to a trusted financial professional and weigh all the pros and cons.

[See: 10 Questions to Ask Before You Hire a Financial Advisor.]

Because once you decide, there's no turning back, and that decision could have a huge impact on your retirement lifestyle.

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