3/20/2011 5:00 PM ET|
Want your Social Security early?
More people are refusing to wait until 65, opting for reduced benefits right away. Are they ahead of the curve or just hurting themselves?
Leave it to boomers to flout one of the long-held rules of retirement planning. Afraid that lawmakers will soon raise 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?
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 are not yet available, financial planners and industry experts say the ranks of early claimers are still growing. This is happening despite the fact that by delaying benefits, individuals can 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 in Houston. He says he has been "begging" many of his clients to delay claiming Social Security -- often to no avail.
While some baby 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.
In February, New Jersey Gov. Chris Christie, a Republican, urged lawmakers to increase the retirement age of Social Security. GOP Sens. Lindsey Graham of South Carolina and Rand Paul of Kentucky 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, the 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.
But even these possible shortfalls are a number of years down the road, and they 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 (currently) in or near retirement," says Chad Terry, the director of retirement solutions at the Principal Financial Group. He says longevity and inflation could constitute more of a risk to portfolios, but "there are some who will take it (the Social Security benefit) no matter what," he says. "They feel, 'I've contributed, I'm eligible, I'm going to take it.'"
There's 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, the vice president of financial planning at the Schwab Center for Financial Research. Another way to look at it: People who take Social Security at 66 rather than at 62 will collect more money over time, provided they live to at least age 77.
That could have an enormous impact on retirement income, says Christine Fahlund, a senior financial planner at T. Rowe Price. For example, she says, a couple that 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 benefits 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, such as if you're in poor health or unemployed. Otherwise, they recommend delaying retirement (and Social Security payments) in order to boost your retirement savings, which probably took a serious hit in 2008.
A February report by the nonprofit Employee Benefit Research Institute found that nearly half of early boomers -- people 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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