Investigate Age-Related Benefit Changes

Physician's Money Digest, August31 2004, Volume 11, Issue 16

Many Americans still don't know that theage at which they'll be eligible for fullSocial Security retirement benefits is rising,and that lack of knowledge couldundermine their retirement plans. In the latest annualRetirement Confidence Survey, the Employee BenefitResearch Institute and American Savings Councilfound that only 18% of those surveyed knew the correctage at which they could collect full Social Securitybenefits. Not surprisingly, 32% assumed that it wasage 65—the historic retirement age.

The truth is, anyone currently younger than age 65will have to wait beyond age 65 to collect full retirementbenefits. Overall, 55% of those surveyedthought they would collect full benefits earlier thanthe correct age, with 12% believing that full benefitsstart as early as age 62. Knowing the right age is crucialto making retirement plans that won't leave youshort of money once you do retire.

Note Age Alterations

In 2003, the full retirement age for Social Securitybegan to gradually increase—from age 65 to age 67.For Americans retiring in the next few years, thischange won't be dramatic. Someone reaching age 65in 2006, for example, will have to wait until age 65and 8 months to collect full benefits. People born in1943 through 1954, however, must wait until age 66.And those born in 1960 or later must wait until age67 to collect full benefits.

Despite the rising full retirement age, Congress didnot change the age at which you can start collectingSocial Security benefits early—still age 62. But benefitscollected early are reduced, and the gap is increasing asthe full retirement age rises. For example, when theretirement age was age 65, retirees who began collectingbenefits at age 62 found their monthly check reduced20%. For someone whose full retirement age is 66, thereduction is now 25%. And for those whose full retirementage is 67, the reduction is 30%.

Furthermore, the actual monthly dollar loss willlikely be an even larger percentage. That's because ifyou continue to work until your full retirement age,you'll probably increase the amount of benefit dollarsyou're eligible to receive from Social Security.

Recognize Related Risks

What are the consequences of not knowing yourcorrect full retirement age? Obviously, you may findyourself retiring early and receiving Social Securitychecks that are smaller than what you expected.Knowing your correct full retirement age might motivateyou to save more now or set a later retirementdate. Of course, you run other risks.

The catch:

If you live until your normal life expectancy, onpaper you will collect the same total amount in SocialSecurity, whether you retire early or at full retirementage. Although you collect a smaller monthly amountby retiring early, you collect it over a longer periodthan if you had waited until your normal retirementage. Should you live longer than your normallife expectancy, you will receive less in total lifetimebenefits. Of course, you will collect larger checksif you delay your retirement.

In addition, you'll have less time to accumulatenon-Social Security retirement assets. A smaller poolof assets and smaller checks may make it difficult foryou to pay for a major expense many early retireesoverlook: health care. You won't be eligible forMedicare benefits until age 65, even if you take earlySocial Security benefits. Perhaps you'll be coveredunder an employer's retiree health plan, but manyemployers are either dropping retiree plans or forcingretired employees to pay substantially more.

This article has been produced by the Financial PlanningAssociation (www.fpanet.org), which is the membership organizationfor the financial planning community.