Social Security and Early Retirement

I’m no financial planner. But I know that I can probably count on the fact that I will have some social security coming to me. But for years I’ve been hearing our country will run out of social security. Less tragically, some say that by 2025 insolvency won’t be complete, rather, a 20% reduction in social security payments could happen. Either way, I would encourage your parent(s) going into retirement to save accordingly.

When you look at our timeline, notice that about the time you hit 30, your parent(s) will need to start thinking about social security. In fact, they can start receiving checks as early as 62. The longer they wait, though, the bigger their monthly check can get. Sounds great, but is there an optimal age to start? The answer is yes! I found a nifty calculator that you can enter your parents age and general life expectancy. The latter is really important. If you think your parents have really bad health, and have poor genes, then they might consider taking earlier social security checks. The same would apply for their 401k and pensions, especially if they lack finances and suffer from heavy debt (more on this later.)

No one knows how long they have to live, but we could ballpark some things. So, with this free online calculator https://financialengines.com/education-center/social-security-planner/ I entered a hypothetical baby boomer couple born in 1950 earning about 50 thousand a year with average life expectancy. (There are also free life expectancy calculators online for a general but never perfect idea, for example: https://www.bankrate.com/calculators/retirement/life-age-expectancy-calculator.aspx).

Great! It calculated that one of the two should start at 69 to get social security, and the other at 70. Any other age combination would mean less cumulative money given their estimated lifespans. You might think that’s a long time from 62, and you’re right. Without the social security check to count on, this could mean putting off retirement that much longer, or a less popular solution: having to save aggressively well before retirement. This may be too late for your parents, but definitely not for you.

Some might think their “best years “of retirement will end at 70, and would prefer to take early social security to fund travel, hobbies, etc. So, there are some good reasons to start social security early. Just make sure you have the resources to fund life after 70 in particular, which will get expensive.
And if your parents decide to keep working while receiving social security, they may get a “double whammy” and need to pay tax on this added income as well!

It doesn’t seem there are many good reasons to dip into our most reliable nest egg too early. Still, there are ways to dip into your retirement nest egg even earlier than 62– by starting IRA or 401k withdrawals, at 59.5, the age at which you can make withdrawals without penalties.
Incidentally, some reasons for withdrawals even before 59.5 would be that you could have high medical expenses (>10% of your gross income), or have to pay for health insurance during unemployment, or to pay for college, or you need money for a first home purchase, to name a few.
I think I opened up a can of worms by bringing up early retirement. However, if you or your parents are considering early retirement, or just increasing their income some with early social security checks and/or making early IRA withdrawals, I’d really encourage you first to get a financial planner who specializes in retirement to see if its feasible. It’s a sticky topic to discuss finances with your parents, so start by just telling them about the above calculator your found.

One more thing to reflect: if your parents live longer than expected, by not saving enough and maximizing social security, you as their child may feel compelled to pitch in, or even quit your job to take care of your loved one. These are not bad in themselves, but even if you accept this, you will have to prepare financially as well. My parents took care of my grandparents for several years, but they managed, but not without sacrifice. So, keep in mind that your part as the “meat” in the “sandwich generation” means that especially if they consider early retirement, when they get older, you eventually may have to pitch in for your parents, not to mention keeping up yours, and your children’s cost of living, in which case careful planning is indispensable.

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