Editor's pick: Originally published Dec. 21.
Most -- O.K., virtually all -- financial advisers advocate waiting as long as possible before a retiree starts dipping into his or her Social Security benefits.
The theory amounts to simple math - the longer you hold off taking benefits, the heftier your Social Security payments.
According to a 2014 study by the Nationwide Retirement Institute, Social Security payouts comprise 40% of all a recipient's post-retirement income (the full retirement age is 66 or 67, depending on the year you were born, according to the U.S. Social Security Administration). But just 15% of Americans actually wait until full retirement to begin taking payouts from their Social Security fund.
That can be costly, as the Social Security Administration's own numbers state.
"If you start your retirement benefits at age 62, your monthly benefit amount is reduced by about 30%," the agency states. "The reduction for starting benefits at age 63 is about 25%, age 64 is about 20%, age 65 is about 13.3% and age 66 is about 6.7%."
In real dollars, the NRI reports that women who take Social Security benefits early average a payout of $1,025 per month. But by waiting until full retirement age, that payout rises to $1,270. And, if a woman waits until age 70 (with at least 16 years of life expectancy left, presumably), that payout rises to $1,630.
So, given the notion you don't want to leave cash on the table by taking Social Security benefits too soon, under what circumstances is it advisable to collect benefits early?
There are a select few instances where that's advisable, and the primary ones are listed below.
A recipient is in ill health - There aren't many reasons to take Social Security early; however, there are occasions when it's the correct thing to do, says Leonard P. Raskin, a money manager at Raskin Global, in Hunt Valley, Md. "You should take Social Security payments early if you are ill and your life expectancy is significantly shorter than the time it would take to break even if you waited until full retirement or age 70 on delay," Raskin says.
A recipient absolutely needs the cash - "If you are short of cash flow, then taking Social Security early might be beneficial, as long as you're not working, since the employment income would cause the Social Security income to be reduced if taken before full retirement age," says Norman M. Boone, a financial planner with Mosaic Financial Partners, Inc., in San Francisco.
A recipient loses his or her job - "If someone loses their job unexpectedly, without sufficient retirement assets to draw down while delaying social security payments, it would make sense to begin drawing Social Security early," says William Stack, founder of Stack Financial Services LLC, in Salem, Mo. "Also, if someone is in good health, but working in an occupation that has become physically too demanding to continue, then drawing Social Security early might make sense, as well."
If you do need to take Social Security payments early, you have a backup up plan, that allows you to refill the financial tank later on.
"You can still choose to suspend your benefits until later," says Brannon Lambert, a money manager at Canvasback Wealth Management, LLC, in Raleigh. Lambert says this scenario "is ideal" for those who may find themselves retired earlier than expected, through no fault of their own. "If a worker is at least 62 years old and finds they need extra income they can choose to file to receive their Social Security benefits early," Lambert explains. "If their circumstances change however after they reach full retirement age and find they no longer need that Social Security payment each month, they can choose to suspend the payments. This will then allow their benefits payments to earn Delayed Retirement Credits at the rate of 2% to 3% per month, or 8% a year."
Collecting Social Security before full retirement age doesn't make much sense on a basic economic level -- you earn more cash benefits by hanging on until age 66 or later. But if you really need the money, go ahead and take it under the conditions listed above - just discuss the issue with a trusted financial services professional before making any big decisions you'll regret five years from now.