Retiring early: Should I tap Social Security or savings?

June 22, 2011: 12:07 PM ET

NEW YORK (Money) -- If I retire early, how do I decide whether to take reduced Social Security benefits early or to delay payments and draw down on my savings? Is there some sort of "tipping point"? -- Douglas Goodman, Tacoma, Wash.

The issue you're grappling with boils down to this: Does it make sense to take smaller Social Security payments early in retirement so you take less money out of savings and give your nest egg a better chance to bulk up for later on? Or does it make more sense to draw on your savings now and postpone Social Security for a number of years so you'll receive a larger check from the government down the road?

A 62-year-old who postpones Social Security until age 66 can boost his or her payment by a third (not counting inflation increases), or possibly even more if they work during those four years. You can estimate the size of the Social Security check you might qualify for at different ages by clicking here).

The answer mostly depends on two things: how much you expect you can reasonably earn on your retirement investments after inflation and how long you think you'll live. Assuming you earn 6% annually on your savings, and inflation cruises along at 3% a year, you're probably better off waiting for the larger Social Security payment you would receive at 66 rather than collecting as soon as you're eligible at 62.

As the chart on the left shows, you'd only have to live to age 81 for it to be worth your while to wait. And unless you're in poor health or your family has a history of early departures, it's a good bet that you will.

A 62-year-old man has better than a 50% chance of living into his early to mid-eighties, and the probability is greater than 60% for a woman, according to Ron Gebhardtsbauer, head of the actuarial sciences program at Penn State.

The longer you live beyond the break-even age, the more you come out ahead. It takes longer to break even, however, if you assume you'll earn a higher inflation-adjusted return.

Planning for smaller Social Security checks

That's because it takes more time for the advantage of a bigger Social Security benefit to compensate for the higher level of earnings your portfolio is generating. So, for example, if you believe you can earn 8% a year while inflation cruises along at 3% annually -- roughly a 5% real return -- holding off would make sense only if you think you'll live to 86.

But while that may make it seem tempting to take Social Security as early as possible and invest more aggressively, remember: invest with too much abandon in retirement and your portfolio could get whacked with serious losses, jeopardizing your future security.

Two final caveats: This sort of break-even calculation makes sense only if you're confident you've got enough savings to carry you through retirement. "If you don't have enough to sustain you, then you may want to work a few more years," says Schwab retirement director Beth Chang.

The idea is that you don't want to run through your savings and have to live on Social Security alone. And don't forget that investment considerations aren't the only things you should consider when deciding when to take Social Security.

Married couples in particular may be able to boost the amount of benefits they collect by coordinating when each claims. For a look at different strategies, check out the Social Security Claiming Guide at the Center for Retirement Research at Boston College. To top of page

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