Early Retirement Choices: Which one is the right one?

Boomers will be faced with some decisions as they near retirement.  Should you take it early, wait it out, work longer?

Never one to shy away from jumping into the fray, which is a little different than jumping to conclusions, I have bumped into more than one conversation about the wisdom of drawing on retirement income too soon.  These folks argue that everyone should plan on working longer (and not just to rebuild retirement accounts - or in many cases, build them from scratch) because they are going to live longer. That sort of argument makes me cringe.

Truth is, not all of us do what we want to do, like what we do and simply can't see ourselves spending one more day doing it beyond the point we have to.

But when it comes to Social Security Benefits and when to draw them, something entirely different comes to mind. Bruce Bartlett offered his opinion on early retirement with several other invited guests in the August 21 New York Times. Mr. Barlett, who is former Treasury Department official in the George H.W. Bush administration and columnist for The Fiscal Times, continued that argument at the blog WallStreet Pit claiming limited space in the paper didn't permit him to make two other points on the topic. (You can read those added opinons here.)

The problem is, this sort of discussion has many nuances: fear, health, security, poverty.  Picking one over the other doesn't reduce the impact of the other.  Sixty-two has become the new retirement age because of fear (that the program will not be there after decades of contributions) and diminished retirement investments (we all know why all too well the reasons, and there are many, for that).  They take it whether they need it or not.  But many need it.

Instead of increasing the age for early retirement benefits, something Mr. Bartlett suggests as actuarially adjusted, SS could offer a program that secures those benefits at 62, sort the same way you need to sign up for medicare at 65 whether you need it or not, and guarantees the benefit without paying out anything until the person actually retires.  A healthy individual could continue working knowing that the benefit is secure and increasing each year they wait.  This would work the same way as the payback program already in place where someone begins withdrawal at 62, saves all of the benefits and then pays it back at full retirement age to receive the higher benefit.

I think the income limit currently in effect does two things: keeps the retiree from working too much which keeps the job market growing.  Benefits are only taxed once all of the income is added in and the threshold is breached - $25k for singles, $32k for married filing jointly.  Suppose a married couple calculated their taxable retirement benefits, their taxable income and the SS benefits and found they could live comfortably on $32k, they would be still well above poverty.  If they had used a Roth IRA or a Roth 401(k) to hedge against this tax issue, they could increase their income substantially without any impact on the benefit. And secondly, it taxes those that can afford to be taxed and in all likelihood, they are the very ones who will ladder their retirement income, drawing on accounts as needed - perhaps pensions first, deferred investments later and SS last.

The argument for living longer is the biggest fear most average workers have.  It is not how long you live, but how livable those years are.  While we all suggest that simply working longer is the best retirement solution, it skirts the real issue of whether they want to or if they can.  I'm guessing that only a small percentage will or could work past even the full retirement age.  Some may have to.  But if the amount of people opting for early benefits is any indication, they want to make sure of some things (getting the benefit) and worry about others as they age (whether they can or should work).

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer