Why Taking Social Security Could Cost You Thousands

I recently attended a weekend barbecue with some neighbors, and at one point the conversation shifted from the usual topics — family updates, local news, sports, and politics — to retirement. Strangely enough, it was raised by a friend's daughter, Barbara, who is in her early 30s. I was a little surprised (but encouraged) that she was already doing some retirement planning at that age.

Barbara is a bright, hard-working human resources manager with a promising future, but after 10 years in a challenging work environment, she said she was beginning to feel a little fatigued. That's certainly understandable. She and another 80 million Millennials have had the misfortune of joining a workforce that's experiencing some major disruptions. For most workers, America's recent economic restructuring has led to less job security, lower wages, fewer benefits, and longer hours. That's not exactly a recipe for long-term optimism if you're a thirty-something.

With this in mind, it didn't take long for me to realize that Barbara raised the issue of retirement not because she was interested in long term financial planning, but instead out of sheer frustration. Barbara's question was, "What is the earliest age I can begin receiving my Social Security retirement benefit?" Age 62 was the answer. "Then that's when I'll take it," she said.

What Barbara didn't realize is that by doing so, she'd forfeit 30% of her full benefit amount. If her full amount was, say, $2,000 per month, then she would be giving up $600. So I said to her, "What if you needed $2,000 a month from Social Security just to break even financially? And what if, by taking your Social Security benefit at age 62 instead of age 67, your benefit amount is reduced by $600 a month, to $1,400?" Barbara's reply: "I'd still take the lower amount."

Of course I couldn't just let the issue end there, so I asked a follow-up question: "But that would put you $7,200 in the hole each year. By your mid 70s your debt would add up to $100,000. How would you pay for it?" "I don't care," she said. "I just want to stop working the moment I first qualify for a monthly retirement check."

At that point I sensed I was stepping on a nerve, so I let it go. But, I'm glad she raised the topic and I give her credit for starting the conversation. Now that the issue has been framed with real numbers and dates, she is in a better position to make a sound decision when the time comes.

For some, the loss of $600 each month for the duration of their retirement would be difficult to absorb. For others, it would be less of an issue. And for others still, there might be health-related concerns or other extenuating circumstances that make early distribution a reasonable choice.

The point is, before choosing to give away so much of what you earned and accumulated over many decades, be sure to consider the trade-offs. Let reason, not emotion, drive your decision.

At what age are you planning on taking Social Security?

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Guest's picture

You are not giving her credit for realizing the value of a bird in the hand. A waiting strategy means she loses real money now for every month she delays. Your statement "the loss of $600 each month for the duration of their retirement would be difficult to absorb" is not phrased accurately. If she starts at 62, she is not "losing $600" each month. She is gaining the full amount now of her "reduced" check. The "losing" starts happening way in the future. So you have to compare the value of what she gets from age 62 to whatever date you decide to choose as the future start date against the full amounts collected thereafter, up to the time she dies. It becomes a present value calculation that also must include an expectation of a date of demise. So it would seem to me that if your goal is to maximize your expected benefit, you must first determine the date you expect to die. And then you also have to look at that against your cash flow now from other sources to see if you can hold out. (On a more cynical note, I'm suspicious that the government is creating a seeming incentive to wait. Why would they offer that? It must be because your waiting is better for them! So if it is better for the government, it can't also be better for the people since this is zero sum? Just a thought.)

Guest's picture

This topic is far from simple. There are many factors that play a roll in this decision as you noted:
"For some, the loss of $600 each month for the duration of their retirement would be difficult to absorb. For others, it would be less of an issue. And for others still, there might be health-related concerns or other extenuating circumstances that make early distribution a reasonable choice."

I personally am a proponent of collecting social security at the earliest age possible. Let me explain.

Let us examine the case of someone who wants to collect social security at 62. We understand collecting social security at the age of 62 you will only collect 70% of what you would collect at 67. While the individual as you put it "would be giving up $600" each month when compared to the amount available to collect at 67 I believe there is still a financial benefit.

Primarily I feel this is the case as during that 5 year period you are collecting money you would have otherwise not had. A quick calculation shows by collecting $1400 a month at 62 they will have collected $1400 x 12 months x 5 years = $84,000 by age 67. This is $84,000 more than you had before.

I don't see why any individual should give up $84,000 to earn an extra $600 a month 5 years later. This can be expanded further to showing $84,000 is equivalent to what would be 140 month of collecting $600. Using this calculation you won't see an overall financial benefit until you reach the age of 79.

Guest's picture
dennis owens

as a government employee i was forced to take early social security to make up for the 400dollar a month decrease in my regular pension. what was supposed to be a 3 tier plan was not as advertised. there is a big difference in being eligible for social security and actually drawing it. i would have waited until later if i had not been penalized for turning 62. oh , i forgot to mention i've had 16 great years of retirement., since age 49 so catch up on 5 or 6 hundred a month for the next 15 to 20 years. not happening if you retire at 70.

Guest's picture

I retired at age 50. Fortunately I had enough saved to last me until 66, (my Social Security retirement 100%.) I was widowed in 2001. In 6 month I lost my job, my husband and 9-11 happened. My stocks dropped. I owned a rental and had enough cash to help me until age 60 when I could collect my husband's widow benefit. Meantime I worked part time, paid of my house, sold my rental just before the mortgage crash, but lost $200,000 in the 2008 crash. Once I got my widows from social security I retired again. I have no debts and plan to keep it that way. I plan to wait until age 70 to collect the maximum social security on my own. Why wait? Because as you can see life has unexpected hazards which creep up. I am more worried about not have enough to live on than getting it spread out by taking it early. My family history shows I odds of living to 100 are very good. I am not so sure about the stock market but by waiting until I am 70 I will make over $2,600 a month plus it will be able to rise do to inflation. It is the cheapest insurance policy and I am living on about $30,000 a year now. If I can still do that with inflation protection and re-save or invest my required minimum distributions, then I might actually have enough to last me. But my health is excellent. If my health begins to fade before age 70 then I will take it sooner. I think the key is to reevaluate your situation EVERY year. Timing is everything and everyone's time is as different as they are.

Guest's picture

She can receive Social Security at age 60 if she is a widower.

Guest's picture
Dave Spradley

What you failed to mention is that the two lines (Total benefit received) do not crkoss until after age 70. Many people do not live to age 70. A person benefits from waiting only if they live beyond 70. You should at least tell the complete story.

Guest's picture

I agree with Josh, and there are even more factors. My family is not long-lived. My father died at 64 and had he not started taking his SS early, he would have collected nothing at all. I started taking mine at 62 and am still working full-time at 66. I don't need the money now, so I'm investing it and earning interest. By the way, the rep on the SS phone was adamant that I should not start collecting when I did, even raised her voice to argue with me. I suspect they have been told to dissuade anyone they can from tapping into their benefits.

Guest's picture

Its about a quality of life. I came late to government work but I watch all my coworkers retiring and they are in their 50's. I'm jealous, but I didnt choose that path. My mother died when she was 63, my father in his 80's. I can expect something in between that as I am not in the optimal health. I dont want to be old and working. I'm ready now, in 10 years, when I am 62 I intend to go as soon as physically possible. So that I have some mobility, ability to drive a car and enjoy my life. 1500 a month doesn't seem like a lot but if your house is paid for and your work related expenses are not there (gas, clothes, lunches) it is entirely do able.

Guest's picture

Very thoughtful comments, Alan...Thank you. Under most circumstances I'm certainly a proponent of accessing cash now vs. in the future. In this case the trade-off is that you lose 7% per year by doing so. If you believe you can invest the money at age 62 to get a consistent 7%+ return then that certainly would put you ahead. But doing so at a time so close to (or actually when you're in) retirement is a pretty risky proposition. Ultimately it's your call, of course. There are clearly circumstances where taking an early distribution makes sense - for example if you are single and in failing health. The main point is that, as is the case with Mary, exasperation shouldn't count as a reason.