Taking Social Security Too Soon Can Cost You

Nearly a million baby boomers plan to apply for benefits this year, but it may not be the best strategy

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The first baby boomers are turning 62 this year, the magical age at which you can begin to lay claim to all those payroll taxes you shelled out paycheck after paycheck your entire working life. The nation's symbolic first baby boomer, Kathleen Casey-Kirschling, a retired Maryland teacher, who was born one second after midnight on Jan. 1, 1946, has already filed online for her Social Security retirement benefits.

Nearly 80 million Americans of the baby boom generation (born from 1946 through 1964) will follow her in becoming eligible for Social Security benefits over the next two decades, a phenomenon Social Security Commissioner Michael Astrue is fond of calling America's "silver tsunami."

Almost a third of the 2.9 million boomers born in 1946 plan to apply for benefits this year, like Casey-Kirschling, according to a recent MetLife Mature Market Institute survey. But class of 1946 boomers who file this year will receive a reduced benefit for life, compared with those who hold out until what the Social Security Administration deems their full retirement age—in this case, 66. (Boomers born after 1946 can find their full retirement age here.) Holding out until age 70 will bring in an even bigger monthly check.

So, for example, a boomer with a final salary of $75,000 might receive a $1,320 monthly Social Security check if he collects at age 62, according to a University of Pennsylvania Pension Research Council Working Paper by James Mahaney and Peter Carlson. If the same boomer were to delay until age 70, he would get $2,884 monthly, more than twice as much. Even after counting cost-of-living increases, the boomer who began to collect at age 62 would by age 70 probably receive only $1,637 a month.

"Waiting is a good deal if you have other means of getting by," says Laurence Kotlikoff, an economics professor at Boston University, unless you are certain you won't live a long life because of a health problem. "If you have a terminal heart condition, you want to take benefits immediately. Otherwise, in general—if you can—you want to wait as long as you possibly can to get benefits." Kotlikoff found that delaying taking the Social Security benefit can raise your standard of living in retirement by up to 10 percent. "That's like working an extra year or two," he says.

Your Social Security benefit increases by approximately 7 percent each year you delay taking it from age 62 to 66 and by 8 percent a year until age 70, Kotlikoff found. That could be a better return than retirees are getting on their investments. "You have to compare that with what your pension is giving you," says Hugo Benitez-Silva, an associate professor of economics at SUNY-Stony Brook. So, if your 401(k) or IRA is not giving you a higher return than that, you might want to start delaying Social Security and drawing down your other assets first, Benitez-Silva says.

Olivia Mitchell, a professor of insurance and risk management at the University of Pennsylvania's Wharton School, agrees. "Delaying is better if you can afford to wait," she says. "What you should do is save more of your money upfront and use that savings to finance your early retirement and then use the [Social Security] benefit later."

But most employees show little inclination to wait before collecting Social Security. The Employee Benefit Research Institute found that 65 percent of current workers plan to retire at age 65 or younger—before most will be eligible for full Social Security benefits. And only about 32 percent of boomers born in 1946 say they will wait until age 66 or beyond to receive full benefits, MetLife reports. Those who plan to collect as soon as possible cite feeling entitled to receive their benefit, preferring to have the cash in their pocket and not the government's, needing the money now, and having a pervasive fear that the Social Security system will collapse.

"There is a widespread belief among Americans that benefits in the future are going to be lower than they are today," Benitez-Silva says. "There are justifications that claiming early may be a very rational behavior." Other retirement experts say the fear is unfounded. "I think the government would sooner default on its debt than cut benefits for someone who is currently age 62," Kotlikoff says.