The true cost of Social Security early retirement

By Jim Blair

Social Security is a popular topic right now not only because the future of the program is in doubt, but also because the baby boomer generation has entered retirement age. The latter equates to 10,000 people applying for retirement benefits every day in America. The most common question revolves around when to retire, and this article aims to help explain the pros and cons of early retirement benefits.

There are three primary age ranges to choose from with Social Security. You can file for benefits early, wait until full retirement age, or elect to wait until age 70. Each age range has a unique set of considerations, and the “best answer” is different for everyone because you need to factor life expectancy and income into the decision.

The earlier you begin to receive your Social Security benefits the less you will collect over your lifetime if you live past age 78. According to information the Social Security Administration has sent out with their annual statements, 10% of those who are age 65 now can expect to survive until age 95 or older. That means even more will survive into their early 90's, and still more will make it will into their 80's.

If you take benefits early at age 62 your monthly benefits are reduced by 25% compared to what you would’ve received if you waited until fill retirement age (66 years old for most). In this scenario, the breakeven point is age 78. Up until your 78th birthday, you will collect the same amount of Social Security benefits whether you took them at age 62 or 66. This means that every check sent after age 78 represents a 25% loss in benefits each month.  

In addition to you losing this income opportunity, claiming benefits early will also reduce the amount of benefits payable to a surviving spouse. Thus, the decision you make on when to retire not only affects your lifetime, but that of your spouse as well.  While you must take your health, family history and financial health into consideration, you should also consider the consequences of filing at age 62.

Now a lot of people still ask about a former provision called the "do over".  This refers to the practice of filing for benefits at age 62, investing your money for financial gain and then withdrawing your application for Social Security benefits at age 70.

In the past, you had to pay back all the money Social Security paid you, but there was no penalty or interest on the money you used to invest for up to 8 years.  You were able to keep all the money you made assuming your investments paid off. After you withdrew your application you simply refilled for benefits at age 70 receiving a 32% increase in your monthly payment.

This was a good practice for those who could afford it, but the Social Security Administration put an end to it in December 2010.  Now you only have a year to change your mind and withdraw your application and you can only do this once.

So there are two major takeaways in this article. First, if you expect to live past age 78 then you should wait until your full retirement age to accept retirement benefits. Second, you only get one year to change your mind, so it is better to make an informed decision from the start to avoid getting lost in all the red tape.

Jim Blair is a former SSA employee and co-owner of Premier Living Social Security Consultants.