At first glance, you might think that beginning social security benefits at age 62 versus waiting until your full retirement age (FRA – currently age 66) sounds like a pretty good deal. You receive four more years of benefits and won’t have to withdraw as much from your savings as you would if you waited until your FRA. By not taking money out of your savings, the money can grow more than it would if it were relied upon to cover all living expenses.
Those arguments have some merit, but probably not as much as most might think. It may indeed make sense in some situations to begin benefits at 62, particularly for someone with serious health issues. However, for anyone expecting to live past their mid-70’s, the numbers tell a different story.
As an example, consider two 62-year olds (Ms. Early & Ms. Normal) who will both receive a primary insurance amount (PIA) of $2,200 per month at their FRA. Ms. Early opts to receive benefits at age 62 and accepts that she will only receive 75% of her PIA, or $1,650 per month. Ms. Normal decides to wait until her FRA (age 66) to receive her PIA of $2,200. Ms. Early is happy with her decision to start at 62 because she will have received $79,200 in cumulative benefits even before Ms. Normal receives her first benefit payment. When Ms. Normal begins receiving benefits, she receives $550 per month more than Ms. Early, thus Ms. Normal’s cumulative benefit grow faster than Ms. Early’s. At age 77, Ms. Normal’s cumulative benefits will overtake Ms. Early’s. If Ms. Early and Ms. Normal both pass away at age 87, Ms. Normal’s cumulative benefits will have exceeded Ms. Early’s benefit by $66,000.
Over 20 years, $66,000 ($3,300/year) may or may not seem like a lot, but one important detail was left out of the above example for simplicity. Social Security benefits are subject to an annual cost-of-living adjustment (COLA – a percentage increase to a benefit) to keep pace with inflation. The reality is that Ms. Early and Ms. Normal will both receive the same COLA percentage, but they will receive different dollar amounts due to their different benefit amounts. Since Ms. Normal’s benefit is greater than Ms. Early’s benefit, her COLA increase will be greater, causing the difference in their benefits to increase over time as well. If one assumes a 2% annual COLA, the monthly benefit difference grows from $550/month ($1,650 at 62 vs. $2,200 at 66) to $907/month at age 87 ($2,707 for Ms. Early vs. $3,909 for Ms. Normal). Using the 2% annual growth scenario, Ms. Normal’s cumulative benefits overtake Ms. Early’s a year earlier (age 76) and her cumulative benefit will exceed Ms. Early’s by $113,417 at age 87!
As with all annuity cash flow streams, the optimal time to start receiving benefits depends on the length of the time the benefit will be received. In other words, if you knew when you were going to die, it would really help determine when you should start taking benefits! As the examples above illustrates, Ms. Early would have been better off starting at age 62 if she knew she was going to die in her mid-70’s. But, the mathematics of longevity side with Ms. Normal because if Ms. Normal is alive at 65, Social Security’s own studies show that she has a 71% chance of living to age 80, a 53% chance of living to 85 and a 30% chance that she will live to 90.
It is unfortunate that the likelihood of living longer than one expects, and the cost of starting social security early, is not fully appreciated by most people who start their benefit at age 62. If they realized that they had a good chance of living to 90, and that by receiving benefits at 62 they were short-changing themselves of $147,219 in benefits, they might have continued to work a bit longer. At first glance, you might think that beginning social security benefits at age 62 versus waiting until your full retirement age (FRA – currently age 66) sounds like a pretty good deal. You receive four more years of benefits and won’t have to withdraw as much from your savings as you would if you waited until your FRA. By not taking money out of your savings, the money can grow more than it would if it were relied upon to cover all living expenses.
Those arguments have some merit, but probably not as much as most might think. It may indeed make sense in some situations to begin benefits at 62, particularly for someone with serious health issues. However, for anyone expecting to live past their mid-70’s, the numbers tell a different story.
As an example, consider two 62-year olds (Ms. Early & Ms. Normal) who will both receive a primary insurance amount (PIA) of $2,200 per month at their FRA. Ms. Early opts to receive benefits at age 62 and accepts that she will only receive 75% of her PIA, or $1,650 per month. Ms. Normal decides to wait until her FRA (age 66) to receive her PIA of $2,200. Ms. Early is happy with her decision to start at 62 because she will have received $79,200 in cumulative benefits even before Ms. Normal receives her first benefit payment. When Ms. Normal begins receiving benefits, she receives $550 per month more than Ms. Early, thus Ms. Normal’s cumulative benefit grow faster than Ms. Early’s. At age 77, Ms. Normal’s cumulative benefits will overtake Ms. Early’s. If Ms. Early and Ms. Normal both pass away at age 87, Ms. Normal’s cumulative benefits will have exceeded Ms. Early’s benefit by $66,000.
Over 20 years, $66,000 ($3,300/year) may or may not seem like a lot, but one important detail was left out of the above example for simplicity. Social Security benefits are subject to an annual cost-of-living adjustment (COLA – a percentage increase to a benefit) to keep pace with inflation. The reality is that Ms. Early and Ms. Normal will both receive the same COLA percentage, but they will receive different dollar amounts due to their different benefit amounts. Since Ms. Normal’s benefit is greater than Ms. Early’s benefit, her COLA increase will be greater, causing the difference in their benefits to increase over time as well. If one assumes a 2% annual COLA, the monthly benefit difference grows from $550/month ($1,650 at 62 vs. $2,200 at 66) to $907/month at age 87 ($2,707 for Ms. Early vs. $3,909 for Ms. Normal). Using the 2% annual growth scenario, Ms. Normal’s cumulative benefits overtake Ms. Early’s a year earlier (age 76) and her cumulative benefit will exceed Ms. Early’s by $113,417 at age 87!
As with all annuity cash flow streams, the optimal time to start receiving benefits depends on the length of the time the benefit will be received. In other words, if you knew when you were going to die, it would really help determine when you should start taking benefits! As the examples above illustrates, Ms. Early would have been better off starting at age 62 if she knew she was going to die in her mid-70’s. But, the mathematics of longevity side with Ms. Normal because if Ms. Normal is alive at 65, Social Security’s own studies show that she has a 71% chance of living to age 80, a 53% chance of living to 85 and a 30% chance that she will live to 90.
It is unfortunate that the likelihood of living longer than one expects, and the cost of starting social security early, is not fully appreciated by most people who start their benefit at age 62. If they realized that they had a good chance of living to 90, and that by receiving benefits at 62 they were short-changing themselves of $147,219 in benefits, they might have continued to work a bit longer. 
I heard an advertisement on the radio this morning for a litigating divorce attorney. This attorney discussed the importance of removing the emotion from divorce and treating the divorce itself as a business transaction. I understood her point – emotions can be messy or interfere with rational decision making. However, emotion is often the biggest part of divorce. Or, it often feels that way to clients.
How can we ask clients to strip that piece out of the process? Rather, as a collaborative attorney, I believe that emotion can be used to healthily guide clients to mutually agreeable resolutions that have long-term staying power. I embrace the opportunity to take the client where they are at – emotions and all – and guide them towards resolution. Engaging a mental health professional or coach in the process can sometimes be the greatest asset provided to clients and allow them to balance the emotions with the necessary business-like decisions.
Treating a divorce as a business transaction often leads to client’s making decisions for purely financial reasons. Using emotions and feelings of fairness or equity may lead to clients feeling as if the resolutions more completely address their needs.
For example, if one spouse cheated on the other, an emotional response of anger or vindication may lead to the hurt spouse to ask for more financial pay-out. This sort of punitive outcome is not supported in the law and rarely agreed to out-of-court. However, if the parties have a co-parenting relationship or more emotional needs, a purely business-like interaction may never address some of the underlying emotions. Facilitating a discussion about how both parties are feeling and what they may need in order to move forward may been more beneficial to the clients than any financial resolution. Some clients want an apology or a better understanding of why something happened. Others may need to put in effort to establish a shared narrative or story for others.
The finances matter – sometimes most of all. The collaborative process embraces the financial side of divorce, but also allows for a more holistic and complete approach that can address emotions, if the clients so desire. 
