Chicago — Many Americans are living on the edge these days, and that means more are opting to take Social Security early. The potential consequences for them down the road are troublesome.
Applying for benefits as soon as eligibility begins at age 62 obviously brings an immediate payoff in the form of monthly checks that won’t stop until you do. Who knows if you will live long enough to come out ahead if you delay?
The downside is locking in smaller amounts for life at a time when people are living longer and retirement can last for decades. For that reason, it’s best to make deliberate calculations and give careful consideration to waiting until you can collect as much as 75 or 80 percent more per check.
Still, a move that should often be held off as long as possible has become a routine step for many during the recession.
The evidence: a big spike in early retirement claims for Social Security. Through last week, applications for benefits in the current fiscal year were up 23 percent over a year ago.
Part of the increase is attributable to aging baby boomers and the increasing percentage of women reaching retirement age after only joining the work force en masse a few decades ago. But Stephen Goss, the Social Security Administration’s chief actuary, says applications are still running about 7 percent above expectations because of the economy.
The average age when people start collecting Social Security is 63.6, based on the most recent calculation. That is likely to drop after this year’s barrage of claims is factored in.
Financial planners report fielding many more calls from clients who are rethinking their Social Security plans.
Joshua Kadish, wealth manager at Retirement Planning Group in Riverwoods, Ill., often has advised clients to delay claiming benefits until 70 if they’re in a position to wait that long. But they’re less likely to heed that now; he’s seeing more of them put in their claims.
“They’ve been laid off from their job and are 62 or older and eligible to start drawing it,” he said. “They see that the probability of them finding a decent-paying job any time soon in this environment are slim, so they’re starting to draw.”
‘Forced’ to do it
That was the situation for 64-year-old Rick Corley of Moore, Okla., who’s now living through his second recession in retirement and feeling the financial fallout.
Corley didn’t agonize over whether to take Social Security early or wait a few years so his monthly checks would be bigger. With his and his wife’s retirement savings depleted badly because of the stock market, he simply opted for the first day he was eligible — his 62nd birthday.
Jean, who like her husband had retired early in 2000 before the tech bubble burst, did the same when she turned 62 a year later.
“We didn’t have to make a decision because I felt we were forced to take it,” said Corley, a retired pharmaceutical salesman.
They get $1,100 a month from Rick’s company pension but could no longer justify regularly tapping his 401(k), which has shrunk from close to $600,000 when he retired to $135,000 today due to the dot-com fiasco and more recent market turmoil.
That left them heavily in need of Social Security, from which they receive a combined $2,300 a month. But their annual income is now more or less fixed at barely two-thirds of the roughly $60,000 they had counted on living on.
If they could have waited to start drawing benefits, the long-term squeeze would be lessened.
Benefits of waiting
Social Security checks are about 25 percent less if you retire at 62 instead of full retirement age, which is 66 for those born from 1943-54. After full retirement age, the monthly benefit will increase by 8 percent for each year you delay.
So the Corleys’ $28,000 income from Social Security could have been bumped up to roughly $35,000 if they’d delayed taking it until 66, or more than $46,000 at 70.
The couple, who paid off their three-bedroom house before they retired, have had to reduce spending everywhere, including downsizing from an SUV to a small car. They decided they couldn’t even afford their $750-a-month health insurance, so they pay as they go and hope to avoid crises until Medicare kicks in at 65.
While they are happy and insist they have no regrets, it’s a preview of the cutbacks and strained budgets that millions of other Americans may be committing themselves to in the years ahead by taking Social Security early.
Rick admits he gave no thought to the size of the monthly benefit check until it was too late to do anything about it.
“We were set for retirement — or so we thought,” he said. “I had about $550,000 in my 401(k), the S&P 500 had averaged 13.5 percent for 25 years, and I was going to take out 8.5 percent a year and live on that for the rest of my life — and even have something left over for the grandkids.”
All of this isn’t to say that taking Social Security early is automatically a bad decision. Sometimes it’s necessary because of a layoff or other setback; other times it may make sense due to failing health or limited life expectancy. But it needs to be thought through carefully.
Sue Stevens, a financial planner who heads Stevens Wealth Management in Deerfield, Ill., says she would ask her clients a lot of questions before simply advising them to delay as long as they can.
“The decision is a little more complicated than they’re probably aware of,” she said. “Do you have a job? Do you have a pension? Are you in a pickle with your assets? Are there two people involved?”
A good place to start is the Social Security Administration’s Web site, which has a discussion on when to start receiving benefits as well as a retirement calculator (socialsecurity.gov/estimator). If you don’t have your annual statement from Social Security, you can find the amount of your estimated benefit there.
It’s important to factor in how long you might live.
The average life expectancy of a 62-year-old today is about 86.5 for a woman and 84 for a man.