Book Review: Retire Early? Make the Smart Choices

I picked up a few books last week about early retirement and retiring abroad. In the next few weeks I will be posting a summary of each, with my notes on things I learned.

The first book is Retire Early? Make the SMART Choices by Steven Silbiger.



The first thing to note about this book is that "retiring early" here means electing to take social security benefits at 62 instead of waiting for full retirement benefits at the normal retirement age of 67 or later. I am always amused to see that retiring at 62 is considered "early" in most developed countries. (For comparison, retirement age in China is 50 for most women and 60 for most men. In India, 60 is the mandatory retirement age for most jobs; many state employees have to retire at 55 or 58.)

As it turns out, more than half of this book is devoted to answering a single question: Is it better to opt for "early" social security benefits at 62, or to wait till the full retirement age of 67 (for those born after 1960)? The answer to this question is extraordinarily complex and dependent on individual circumstances. This book does a great job of explaining the basic factors to consider before making this decision.

Consider the basics:

  • Those born after 1960 will be eligible for full retirement benefits at 67.
  • You are eligible for reduced benefits at 62, but if you opt for this, it will reduce the payment amount for the rest of your life. A typical person born after 1960 will lose 30% of his social security amount by opting to retire early.
  • You can also retire in the years between the earliest retirement date and full retirement, and get a bit more money with each passing year.
  • You can keep working past the full retirement age (till age 70) and get much more. A typical person born after 1960 will get a 24% increase in the payment if he opts to start social security at 70.

Based on the above, the decision on when to take social security appears to be straightforward: You calculate the "break-even point" which is the age till which you have to live in order to "break even" if you delayed starting social security payments. Based on your life expectancy, if you expect to live beyond your break-even point, it is worth delaying the start of your social security payments. The book provides charts to help with estimating your break-even point.

However, the book then goes on to explain a host of other factors to consider.

Note: In the following, I have used the terms husband and wife for simplicity. The rules are equally applicable even if the genders were reversed. The tax rules below use the 2005 figures from the book; they may have been adjusted for inflation since then.

Spousal benefits

  • A wife can collect on her own career benefits or collect 50% of her husband's benefits (provided the husband has already started collecting benefits), whichever is greater.
  • If a wife, who collects based on her husband's record, elects to retire at 62, there is a significant reduction in her benefits. A wife born after 1960 who elects to start receiving payments at 62 will typically receive only 32.5% of the benefits of the husband's full benefits, instead of the 50% that she will be eligible for at full retirement.
  • If the husband also elected for early retirement, the reduction in the benefits for the wife will be even more drastic.
Survivor benefits
  • A surviving wife who is 60 can collect about 70% of her husband's benefits, and a full 100% of the husband's benefits when she reaches full retirement (assuming that this is greater than any benefits she is eligible for on her own record, since she can take only one of the two).
  • If the husband had elected for early retirement, the surviving wife's benefits will be based on the husband's reduced benefits. The husband's electing for early retirement will then have an impact for many more years depending on the wife's life expectancy.
Pensions

For workers eligible for a federal pension, there may be reductions to their social security benefits due to the federal pension payments. According to the book, many private pension plans also reduce pension benefits depending on the social security benefits that a person is eligible for. This is something I need to look into since I have a defined-benefit pension plan at work.

Working during retirement
  • If you continue to work while taking early retirement benefits, your benefits will be reduced if you earn over a certain level, a restriction known as "annual earnings test".
  • For earned incomes over $12,000, benefits will be reduced by $1 for every $2 of earnings over the limit till you reach full retirement age. Once you reach full retirement age, there is no reduction in your benefits.
  • For example, a modest part-time job that pays $25,000 held by an early retiree can completely wipe out his social security check.
  • Passive income (dividends, capital gains, rental income) is not considered for the annual earnings test.
Taxation
  • IRS may tax social security benefits in both early and full retirement. IRS considers both earned and passive income in figuring your taxes.
  • To determine the taxability of social security benefits, you first calculate your "Base amount", which is your Adjusted Gross Income (AGI), plus half your social security benefits, plus any tax-exempt interest.
  • If your Base amount exceeds $32,000 (for a married couple), then 50% of the benefits are taxable.
  • If the Base amount exceeds $44,000 (for a married couple) then 85% of the benefits are taxable.
  • Taxes are not withheld from social security checks, so the fact that you may lose a significant portion of your social security benefits as tax is often a surprise to retirees.

The book covers all of the above issues in detail, devoting a chapter to each item above. The rest of the book contains advice to retirees on withdrawal strategies, investments etc., but most of it is material you can find elsewhere. The book's strength is its extensive discussion of social security.

I recommend this book for those considering opting for early social security benefits, as well as those who want to have a better understanding of how the current social security system works.

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