In a famous experiment, a child is given a classic problem: Eat a marshmallow now or wait for a bigger reward.
Isn’t that how most people face retirement or financial planning? Live now and hope for the best later? As in the experiment, a little self-control and savings discipline goes a long way to ensuring financial comfort in retirement.
The specific problem millions of Americans in their 50s and 60s are facing is a classic marshmallow decision: Take Social Security at age 62 or wait until “full” retirement age around 66, or at 70, when you’ll get the maximum benefit.
If you’re sick, disabled or unable to work, your life isn’t so sweet, so you’ll probably take Social Security at 62. But there’s a downside.
Once you take Social Security, your benefit is locked in a permanently low monthly payment relative to your full retirement benefit. For example, when I look at my annual Social Security statement, here’s what the government tells me (based on my lifetime earnings):
- At 62, my monthly benefit will about $1,800 a month. While that’s enough to cover my mortgage, insurance and car payment, it’s not enough to cover taxes and food. Not such as good deal for me.
- If I wait until age 66 (and 6 months), I’ll receive about $2,600 a month. Not bad, but still not enough for me to live on. If I’m healthy, I will wait until age 70 to collect.
At 70, I (and you if you can wait) will reap the full bonus of Social Security’s delayed retirement incentive: I’ll receive more than $3,300 a month. I won’t be living high on the hog, but it will cover most of my monthly nut.
“Like the marshmallow test, consuming now means having less money in the bank later,” notes Kim Blanton of the Center for Retirement Research at Boston College.
“The test also applies to deciding when to retire. Retiring becomes extremely tempting for baby boomers who want to escape from work after decades in the labor force. But those who wait patiently for a few more years will have a sweeter retirement: a much larger Social Security check and more 401(k) savings distributed over fewer total years in retirement.”
Should you consume the financial marshmallow early or wait? As I mentioned earlier, make a decision based on your health and savings. If you choose to work longer or just wait to take Social Security, you can grab more dollars later. It’s that simple.
One wild card, though. GOP leaders are once again floating the odious idea of cutting Social Security and Medicare. That would mess up your ability to enjoy a secure financial lifestyle in retirement.
At the very least, run the numbers yourself. Check out the retirement benefits calculator and see what’s best for you.
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