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Tempted to retire at 62? Here’s why it pays to wait

by John Levan | Contributor
March 27, 2020


According to the rules of the Social Security Administration, you are allowed to retire and claim benefits at the age of 62. But as you probably already know, just because you may do something doesn’t necessarily mean you should do it.

Your 62nd birthday has just arrived, and with it came an overwhelming temptation to retire. All you can think about is how wonderful it would feel to cast off the burden of your job and live the remainder of your life unencumbered.

It’s a fact that you may start claiming Social Security benefits at the age of 62, but you will not receive 100% of your monthly benefit if you do. You must wait until your full retirement age to get that. And if you can afford to wait a bit longer, you can get even more. Check this out:

Bill is a 62-year-old single man trying to decide whether to collect Social Security benefits

Look at the table below. You’ll see how Bill could increase his monthly benefit by waiting.

At 62, Bill will be collecting At 66 1/2, he will get Waiting until 70 will boost it to
At 62, Bill will be collecting$1,450 At 66 1/2, he will get$2,000 Waiting until 70 will boost it to$2,560

If Bill’s full retirement age is 66½, his Social Security benefit is reduced by:

  • About 30 percent if he starts collecting at 62
  • About 25 percent if he starts collecting at 63
  • About 20 percent if he starts collecting at 64
  • About 13.3 percent if he starts collecting at 65
  • About 6.7 percent if he starts collecting at 66

But won’t he collect a higher total from Social Security by getting a head start at 62?

Well, maybe. It all depends on how long he lives. Look at the next table:

Age at Death Amount accumulated if retired at age 62 Amount accumulated if retired at age 67 Amount accumulated if retired at age 70
Age at Death67 Amount accumulated if retired at age 62$87,000 Amount accumulated if retired at age 67$0 Amount accumulated if retired at age 70$0
Age at Death70 Amount accumulated if retired at age 62$139,000 Amount accumulated if retired at age 67$72,000 Amount accumulated if retired at age 70$0
Age at Death80 Amount accumulated if retired at age 62$313,200 Amount accumulated if retired at age 67$312,000 Amount accumulated if retired at age 70$307,200
Age at Death85 Amount accumulated if retired at age 62$400,200 Amount accumulated if retired at age 67$432,000 Amount accumulated if retired at age 70$460,800

These cumulative figures do not include any increases to the monthly benefits for inflation or the effects of income taxes. More importantly, they don’t show the impact that retiring at 62 could have on Bill’s retirement savings.

Is it possible that Bill could outlive his income?

Once again, it depends on how long he’ll be drawing down his savings. Suppose our fictitious “Bill” retires with $400,000 at the age of 62 and begins to collect his $1,450 monthly Social Security benefit. Unfortunately, that amount is less than half of what he needs to maintain his current lifestyle, so he supplements it by withdrawing $2,000 each month from his retirement savings.

Assuming he has the funds invested in a conservative mix of stocks and bonds earning 4% annually, Bill will have depleted his retirement accounts by the time he reaches the age of 89. If he is forced to use some of those retirement funds for a major purchase along the way, he will have outlived his income much sooner.

One word of advice: Some retirement sages will tell you that you will be able to live on much less income after you retire. Don’t take those well-intentioned words too seriously. Most retirees will find that for every dollar of expenses they are saving by not working — clothing, commuting, lunches, etc. — they will need at least an extra dollar for traveling, hobbies, eating out and all those other things retirees have been waiting to do.

How much difference will it have on a retirement account by delaying benefits?

As it turns out, quite a bit. Let’s say our imaginary friend Bill waits until 67, his full retirement benefit age, to start collecting benefits. He keeps contributing to his 401(k), Roth IRA or traditional IRA.

Using a figure of $7,000, the maximum allowable annual contribution to an IRA for Bill’s age, and keeping the earnings rate a very conservative 4%, his $400,000 in retirement savings will have grown to $525,000. Waiting until age 70 will have boosted it to $613,000.

So, by waiting just five years to retire, Bill can now reverse his withdrawals – $2,000 from Social Security and $1,450 from savings — to come up with the monthly income he desires. Now, instead of running out of savings if he lives to the age of 89, he will have an account balance of $638,000. Waiting to collect until he is 70 years of age will leave him with just short of $1 million at the age of 89.

What about health insurance?

If you’re planning to retire at age 62, you'll also need to provide for your health insurance since you won't be eligible for Medicare until you turn 65. If you have a working spouse, you might be able to remain on his or her plan. Since “Bill” is a single man, he will need to look at other options.

The Consolidated Omnibus Budget Reconciliation Act — better known as COBRA — will allow Bill to stay on his employer's health care plan for a maximum of 18 months. It will probably be more expensive than when he was an employee, and since he can’t stay on it until he is 65, he will have to find coverage through the Affordable Care Act, for instance, when his COBRA coverage ends. Bill’s options will vary based on where he lives, and these plans may also be quite costly.

Also, remember that Medicare will not cover all health care costs. Most people on Medicare purchase either Medicare Supplement Insurance (Medigap) or a Medicare Advantage Plan, either of which will add health coverage expenses to your budget.

Will it help if I take on part-time work to supplement my Social Security benefits?

Yes, it will, but be aware that until you reach full retirement age, Social Security will subtract money from your retirement check if you exceed a specific amount of earned income for the year. In 2019, the limit on earned income is $17,640 ($1,470 per month). The amount increases each year, but if you are collecting Social Security retirement benefits before full retirement age, your benefits will be reduced by $1 for every $2 you earn over the limit.

Once you reach full retirement age, there is no limit on the amount of money you may earn and still receive your full Social Security retirement benefit.

Does it ever make sense to retire when you turn 62?

Yes, but probably not from a financial perspective.

People often retire early because health issues make it difficult to continue, or they don’t believe they will live too much longer. Others hate their jobs and want to get out as soon as possible. Some can’t wait to begin a second career, and they know that the combination of Social Security benefits, earned income and savings will afford them a comfortable retirement.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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