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Should You Retire Early?

In most cases, it makes sense to take the benefits earlier rather than later.

By James P. Ruth, CFP

Like most of their clients, many financial advisors want to retire early and the monthly income from Social Security can often be an important part of this decision. But does it really make sense to take those benefits early when you can wait three to five years and receive a substantially larger retirement income for life?

While records reveal that 60 percent of U.S. workers elect to start Social Security retirement benefits at age 62 (the earliest age they are eligible to begin receiving benefits), some people must stumble into a decision without giving it much thought. But the stakes are too high to leave such a decision to chance.

Factors to consider
There are many factors to consider when making an early retirement choice. Health and family history can play an important role in the decision, as can job satisfaction. Also, if you like your work, you may not want to just walk away from it at 62 or earlier.

Other factors to consider are the size of your nest egg, other sources of retirement income and the need or desire to continue working after early retirement. In addition, early retirement before the full retirement age (65 to 67) will mean a 21 percent to 30 percent reduction of your income. (See the table below for details.)

Earnings test
There is another critical point to keep in mind. Previously, all Social Security income was subject to an earnings test and a possible reduction for post-retirement employment earnings. However, that changed on April 12, 2000, when the Senior Citizens Freedom To Work Act was signed into law by President Bill Clinton. This law repealed the earnings limitation on benefits for individuals who reach full retirement age (ages 65 to 67). While this is great news for some, it does not change things for early retirees. There is still an earnings test and a reduction of benefits for early retirees on all income earned over $10,680 in 2001(increased each year as wage levels rise). One dollar of benefits is lost for every two or three dollars of earnings over the exempt amount.

If you are financially able to wait until you are 65, should you? After all, every year you wait means you will receive a larger benefit for life. However, our analysis concludes that in most cases it makes sense to take the benefits earlier rather than later unless you continue to work and earn significant income. The reason is simple. If you delay receiving full benefits, it will take about 12 years to break even. Add another six years to that if you consider the time value of money, which is 4 percent. So, all things being equal—and they rarely are—you should take the money and run.

James P. Ruth, CFP, is a registered representative and president of Potomac Financial Group in Gaithersburg, Md. He can be reached at 301-948-3900 or

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