Should you consider taking Social Security early?

My clients frequently ask ‘when is the right time’ to start taking Social Security. The most correct answer which is given by both advisors and the Social Security Administration is that you should turn on this income stream when you reach your Full Retirement Age (FRA). Collecting at your FRA is the first opportunity at which you can collect your full benefits and continue to work if you so desire. If you collect your benefits before your FRA they will be reduced and, depending on your earned income, they could be reduced even further. Even so, some people are buzzing about the idea of taking benefits early. After some careful pondering I’ve concluded that this isn’t necessarily the worst idea for some people in certain situations:

First, as a market bull, I have to point out that both bond and equity prices are historically ‘cheap,’ even after the recent rally we’ve had in the major market indexes. Even if you don’t need to take social security at this point, you may be better off taking those payments and funneling them into a portfolio which matches your risk tolerance. If you started this strategy six months ago with a balanced portfolio of stocks and bonds, you’d be doing fairly well at this point. And if the S&P 500 crosses back above 1,000 this year like many are predicting, well, you do the math.
Next, the reality at this point is that retirement accounts are down in value across the board. Those who take withdrawals from their investment accounts, whether in lump sums or as income, are likely collecting less this year than they have in the past several years. They may need those social security payments—reduced or not—now! This is especially true of those in their late 50’s and early 60’s who recently got laid off. Their chances of landing a hot job with fabulous benefits isn’t exactly a given anymore. It may be smarter to plan around not getting a job and seeing how much you can squeeze out of the government through unemployment benefits, social security, etc. It also can be detrimental to a retirement plan to withdraw large sums of money during market downturns because you end up getting a lesser share of the market rally when/if it returns. This concept of ‘sequence risk’ has proved a real concern during this recession for retirees and has been one of the major marketing pushes for companies which sell annuity products.
The next reason involves a process which many people aren’t aware of. If you end up turning on Social Security and later realize that it would have been more to your benefit to have waited, you can fill out Form 521 (Request for Withdrawal Application) and repay the benefits which you have received. You can then start a new, higher level of monthly benefits based on your new, higher age. Cool, right? I’ve even had some clients get letters from companies which claim they can ‘increase your payments’ regardless of your age. After some research we determined these are people trying to expose Form 521 as a brilliant loophole and charge a fee to help people increase their incomes.
Finally, there’s always that ‘paranoia’ reason of taking the money while you can get it. The government claims that they will continue paying out promised benefits indefinitely, and that those in their 50’s and 60’s have nothing to worry about. I actually do believe the government after watching how much money they have thrown at the banks during this recession—it makes the ‘social security shortfall concern’ look somewhat insignificant. Even so, some might wish to take government handouts when they become available rather than trying to figure out when the most beneficial time may be.
I welcome any comments on these thoughts—it’s the first time I’ve ever considered telling certain clients to take Social Security benefits early.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

2 thoughts on “Should you consider taking Social Security early?”

  1. Because of the “withdrawal” option, there may be little or no downside to taking SS early (before FRA) and some upside. If one dies before their expected time (age 77 or 78 for SS purposes?), they will have gotten more in benefits than had they waited until FRA. And if one takes benefits early, when they reach FRA (or any time), pay back without any interest or penalties the benefits they have taken and start anew at the higher FRA level of benefits, having had the use of the money cost-free. (The last isn’t a big $$$ advantage, but it be worth $1-2K, depending on what return one can earn.)
    With the “withdrawal” option always there, what’s the downside of taking SS early? Only that you wouldn’t save the amount taken out and have it to pay back later.

  2. Another way to look at this question…
    Assume you could get $15K a year starting at age 62 or wait until age 66 to start and get $20K a year. If you start at age 62, then by the time you turn 66 four years later, you will have pocketed $60K in all, which could have been invested, and hopefully would have left you with >$60K (ignoring taxes and assuming money invested rather than simply spent). Now, at age 66 you would have the choice of keeping the $60K+ or returning the $60K SS paid you in benefits over the previous four years (you keep the “+” for your troubles) and start drawing $20K a year rather than the $15K a year you had been drawing.
    If you go that route (SS Form 521), you are in effect buying an annuity starting at age 66 that will pay 8.33% ($5K per year for life in return for $60K lump sum payment). The annuity will be issued by the financially strongest possible payor (the US gov’t); it will be fully adjusted for inflation each year; and it will pay a surviving spouse benefit of 50%. That annuity is probably a good deal for those who are going to live close to or more than the expected number of years, and an even better deal for females, who have longer life expectancies than men.

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