Why Workers Sign Up for Social Security at Age 62

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Getty ImagesMany workers claim Social Security as soon as possible, but they might regret that decision later.
By Emily Brandon

The most popular age to sign up for Social Security is 62, with 32 percent of men and 38 percent of women born in 1946 claiming benefits at that age. Starting benefits at age 62 provides valuable retirement income as soon as possible, but it also triggers a reduction in monthly payments because retirees collect them over a longer period of time. A 62-year-old who signs up for Social Security in 2014 will get 25 percent smaller checks than if he waited to claim at age 66, his full retirement age. Here's why many retirees claim Social Security at 62, even though it results in significantly smaller monthly payments.

Already out of the workforce. People who are unemployed at age 62 and unable to find a new job often sign up for Social Security to bring some income into the household. "Some people who did not plan to sign up at age 62 may have experienced a job loss during a bad economy, and they need the income," says Andy Landis, author of "Social Security: The Inside Story." Those who are employed full time between ages 60 and 62 are 30 percent less likely to claim Social Security early than those who no longer work full time, according to a new Government Accountability Office report. "Many unemployed older workers struggle to find new jobs and may face unique re-employment challenges, such as employer reluctance to hire older workers or out-of-date skills. And, long-term unemployment can motivate older workers to claim early Social Security," according to the report.

A strenuous job. People who work in physically demanding jobs including mechanics, construction, precision production, operators and farming are 55 percent more likely to claim Social Security benefits early than workers in other fields, GAO found. Those in managerial and professional jobs are 32 percent less likely to sign up early than other occupations. Workers without a college degree were also 23 percent more likely to claim early.

Have worked a long time. The 35 years in which you earn the most are used to calculate your Social Security payments. Those who haven't worked that long have zeros averaged into their calculation, which significantly reduces payments. Those who have worked at least 35 years by ages 60 through 62 are about 38 percent more likely to claim Social Security early compared with those with shorter work histories. "For people who have gaps in their earnings history, working a little bit longer to fill in the gaps can make a big difference in your Social Security payout," says William Meyer, founder and managing principal of Social Security Solutions, a company that analyzes Social Security claiming strategies. "If you work a little bit longer and you have a higher earnings year that can replace a lower earnings year, then it can be worthwhile."

The financial crisis. The financial crisis of 2008 caused a spike in Social Security claiming. Those who were laid off during the wave of employment in 2009 were much more likely to claim Social Security early versus people who separated from their jobs in other years, the GAO found.

Don't expect to live a long time. How long you think you will live plays a role in when you sign up for Social Security. The GAO found that those who expect to live to at least age 75 are significantly more likely to delay claiming benefits than those with lower expectations. "If an individual perceives they have a relatively lower chance of living to reach average life expectancy, they may believe it is advantageous to claim early so that they can receive benefits for more years before they die," according to the report. But if you end up living longer than expected, waiting often pays off. "If you are in your 60s, your life expectancy is mid-80s, so unless you do have a reason to believe you will have a short life expectancy, on average, you will get more if you wait until 70," Landis says.

It's also important for married individuals to base their claiming decisions on their joint life expectancy. When one member of the couple dies, the surviving spouse can inherit the deceased spouse's Social Security payment amount if it's higher than what he or she is already receiving. "If you get the higher earner's benefit as high as possible, the payout tends to go to the surviving spouse," Meyer says.

After paying into the system for decades, it's tempting to start your Social Security payments as soon as you can. But the decision to sign up for benefits deserves careful consideration. "The optimal claiming decision for each individual depends on many factors, such as expected mortality, employment opportunities and health," GAO found. "While our findings demonstrate the financial advantages of delaying claiming until the full retirement age, this does not necessarily mean that everyone would be better off delaying."

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at ebrandon@usnews.com.

12 PHOTOS
10 Cities Your Financial Adviser Is Begging You Not To Retire To
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Why Workers Sign Up for Social Security at Age 62
  • Cost of living -- 114.1
  • State tax burden -- 8.4 percent
  • Median house price -- $377,625, per Zillow.com
  • Climate -- 69/39 January, 105/75 July
  • Traffic congestion -- Didn't make the Forbes list
Scottsdale is a retirement mecca, with a reasonable cost of living, state and local taxes well below the national average, a great quality of life and plenty of amenities. But housing costs are nearly double the national average. Winters are warm, but summers are sizzling hot. Peak temperatures can reach close to 120 degrees -- after all, it's in the desert. The locals will dismiss it as "dry heat," but that kind of heat will still send your electric bill for air conditioning soaring, and can necessitate you buying new cars more frequently than you'd like.
  • Cost of living -- 130.0
  • State tax burden -- 9.3 percent
  • Median house price -- $417,600, per Zillow.com
  • Climate -- 74/64 January, 89/80 July
  • Traffic congestion -- Didn't make the Forbes list

Key West offers Caribbean weather in the U.S., an attribute that makes it a natural choice for retirees. And who could resist the Jimmy Buffett-Parrot Head thing, especially once you're living a life of leisure? 

You might be better off if you resist. The cost of living is 30 percent higher than the U.S. average, and housing costs at least twice as much. Travel is another issue. Key West is the most remote location in the continental U.S. The only road off the 6-square-mile island is the Overseas Highway, a 127.5-mile causeway that is largely one lane in each direction.

Hurricanes -- all too common in Florida -- are rare in Key West  -- though Wilma did hit it in 2005. But when they do impact the island, though, it's worth noting that the city has the Atlantic Ocean on one side and the Gulf of Mexico on the other, and there's no part of it that's more than 18 feet above sea level. So homeowners must pay several thousand dollars a year for hurricane insurance.

  • Cost of living -- 132.3
  • State tax burden -- 11.2 percent
  • Median house price -- $482,000
  • Climate -- 66/50 January, 77/67 August
  • Traffic congestion -- Didn't make the Forbes list
As big California cities go, San Diego is a bargain. But compared to the rest of the country, San Diego is certified high-cost. Yes, the weather is near perfect year-round. But the cost of living is one-third higher than the rest of the country, and house prices are nearly 2½ times the national average. Add in California's high state and local tax rates and the earthquake issue, and San Diego should be crossed off your list of potential retirement cities.
  • Cost of living -- 165.7
  • State tax burden -- 10.2 percent
  • Median house price -- $680,000
  • Climate -- 80/66 January, 88/75 July
  • Traffic congestion -- Second worst gridlock in U.S.
Can you imagine a more idyllic place to retire than Honolulu? Probably not. But as beautiful as it is, it shares many of the financial strains common to other cities on this list, plus a few more.

The overall cost of living is second only to New York City. After all, most of the goods people need have to be shipped across thousands of miles of ocean. The state tax burden is only slightly higher than the national average, but the median house price is triple the national average.

Finally, as far as cost of living is concerned, Honolulu has an unusual financial issue: travel expenses. Sooner or later, you'll want to get away from Hawaii. And there's no cheap way to escape from this paradise.
  • Cost of living -- 164.0
  • State tax burden -- 11.2 percent
  • Median house price -- $860,000
  • Climate -- 57/46 January, 70/55 September
  • Traffic congestion -- Third worst gridlock in U.S.
San Francisco frequently makes those "favorite cities in America" lists and for good reason. Situated on a peninsula between the Pacific Ocean and the San Francisco Bay, it is one of the most scenic cities in the world. Mild weather year-round, world class cuisine, charming neighborhoods and an eclectic population make it one of the most desirable places to live anywhere in the world.

But it has the highest median house prices in the country, which should scare off retirees. Its cost of living trails only New York City and Honolulu. And like the rest of California, its state and local tax burden is second only to New York.

One other reason people might avoid living in San Francisco is that it's prone to earthquakes. While that's certainly a concern for personal safety, few people from non-earthquake prone areas realize how it increases your cost of living. Homeowners need to pay several thousand dollars per year for earthquake insurance.
  • Cost of living -- 140.1
  • State/district tax burden -- 4.0 percent on first $10,000 and up to 8.95 percent on income greater than $350,000 in D.C., 10.2 percent in Maryland, 9.3 percent in Virginia
  • Median house price -- $395,000
  • Climate -- 43/29 January, 88/71 July
  • Traffic congestion -- 10th worst gridlock in U.S.
Washington is centrally located, is filled with historic attractions and has some of the most beautiful neighborhoods in the country. It also has one of the highest effective local income tax rates in the country. The district taxes the first $10,000 of income at 4 percent, then 6 percent to $40,000, then 8.5 percent on all income over $40,000 (you can exempt up to $3,000 in retirement income).

Like other cities on this list, Washington sports a high cost of living and some of the highest housing prices in the country. The area also has its share of toll roads, and traffic is a recurring problem. This is especially troublesome during the holidays and summer months. Interstate 95 -- which bisects the metro area -- is the principal travel corridor between the Northeast and Florida. Making traffic matters worse: the near-permanent road construction projects.
  • Cost of living -- 136.4
  • State tax burden -- 11.2 percent
  • Median house price -- $456,000
  • Climate -- 68/48 January, 83/64 July
  • Traffic congestion -- Worst gridlock in U.S.
As recently as the 1970s, Los Angeles was widely viewed as the city that all America was looking to move to -- or at least to imitate. Perfect weather, endless beaches, palm tree-lined streets, plentiful housing, a powerhouse economy and the lure of rubbing elbows with a celebrity or two. Today, about the only things L.A. has going for it are near-perfect weather and In-N-Out Burger. The rest is mostly a faded memory. The city's success was, in fact, a key contributor to its decline: The near-doubling of the metro population since the 1970s has created East Coast levels of human congestion.

Property values are higher than New York's and nearly twice those of Chicago. The state and local tax burden in California is second only to New York, and the overall cost of living in L.A. is more than one-third higher than the national average. California's unfunded pension liabilities are nearly as high as those in Illinois, threatening serious tax increases that could squeeze retirees. Nagging quality of life issues include the worst traffic congestion in the nation and smog that could lead to higher medical costs.
  • Cost of living -- 132.5
  • State tax burden -- 10.4 percent
  • Median house price -- $370,000
  • Climate -- 36/22 January, 81/65 July
  • Traffic congestion -- Ninth worst gridlock in U.S.
Boston is the quaintest large city in America, sporting centuries-old but impeccably maintained architecture, neighborhoods and surrounding communities that just ooze with charm and close access to the beaches of Cape Cod and the mountains of Vermont and New Hampshire. If Boston were a less expensive place to live, it could well be an popular and smart retirement destination.

But it isn't. The high cost of living and high housing prices are the main reasons cited by former residents for leaving the state. The state tax burden is higher than the national average; the cost of living is about one-third higher than the national average; and house prices are nearly double the U.S. median. Translation: a large chunk of your retirement income would be spent just covering basic living expenses.
  • Cost of living -- 116.9
  • State tax burden - 10.2 percent
  • Median house price -- $247,000
  • Climate -- 32/18 January, 84/68 July
  • Traffic congestion -- Didn't make the Forbes list
Based on the numbers, Chicago wouldn't seem to be the retirement financial disaster that other cities on this list are. The state tax burden is only slightly higher than the national average; the cost of living is tolerably higher than the U.S. average; and house prices -- while higher than the nation in general -- are downright affordable compared to the coastal cities.

However, in addition to being a generally more expensive place to live than the nation at large, the area faces burgeoning problems just over the horizon. Illinois faces the highest unfunded pension obligations of any other state in the country, at around $100 billion. Chicago faces a nation-leading $20 billion unfunded pension liability. Such deficits scream out for higher taxes across the board. We can only speculate as to which taxes will be raised (or created).
  • Cost of living -- 216.7 Manhattan, 145.7 Nassau County
  • State tax burden -- 12.8 percent
  • Median house price -- $972,000 Manhattan, $440,000 Nassau County
  • Climate -- 38/27 January, 84/69 July
  • Traffic congestion -- Fifth worst gridlock in U.S.
The area has fantastic amenities -– theater, music, concerts, festivals, ethnic foods, diverse and quaint neighborhoods and close access to beaches and mountains. It also has probably the most comprehensive public transportation system in the U.S. But it breaks down spectacularly when it comes to the costs. The area has close to the highest cost of living in the country, which gets markedly worse the closer you are to Manhattan. House prices are out of sight, particularly in the more desirable communities and neighborhoods. New York State has the highest state and local tax burden in the country. New Jersey has the highest real estate tax burden in the country. And nearby Connecticut isn't much better.

Weather runs from winter-time deep freezes to protracted summer heat waves. The preponderance of bridges, tunnels and their tolls -- as well as antiquated roads running through quaint town centers -- makes congestion a constant problem, even on the weekends.
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