The fragile economy and job market has generated a lot of fear in future retirees. Some have been laid off from good jobs, while others have watched their retirement portfolio significantly diminish in value. These factors, combined with the folks who are simply tired of working, has created a virtual gold rush for early Social Security retirement benefits.
There seems to be a common sentiment here that one should take what they can get from Social Security while it is “still there”. But if you are racing against the collapse of Social Security then you are only hurting yourself. Today’s reports show that the system will remain solvent for at least 25 more years under the current model. Yes there will be changes down the road, but you are more likely to see higher taxes for workers as opposed to reduced benefits for retirees.
So what are the biggest mistakes in taking Social Security retirement benefits early?
The first one has to do with health insurance. Even if you elect to receive early benefits at age 62, your Medicare insurance does not begin until age 65. So if you leave a stable job with health benefits because you think the combination of savings and social security will be enough to survive retirement – think again. An average couple in their 60’s pays close to $2000 per month for private health insurance (not including out-of-pocket expenses). At this price, most of your Social Security money will be spent on health care.
The second big mistake caused by early retirement is called a “lifetime benefits reduction.” By waiting until full retirement age (66 for most people) your benefits will be about 30% higher. This benefits level also applies to your spouse. If you die first, your spouse will take over the higher benefits until they die. Social Security benefits are reduced approximately 8% for each year that you retire before your full retirement age. On the other hand, they will increase an additional 8% for each year you wait after full retirement age up to age 70.
The bottom line here is that early retirement is not a risk-free proposition. A bad health care situation alone could wipe out your entire savings. You must also consider what kind of income your spouse will have if you die first. Taking Social Security early without good reason can be a big mistake in retirement planning.