They’ve paid into Social Security over their working years, seen it deducted from their paychecks, and now they’re old enough to collect. The fundamental question we hear from clients at or near retirement is: Should they delay Social Security benefits?
The answer? It depends. That may be an underwhelming response but the decision about when to file is based on individual needs and lifestyle. Let’s begin by clarifying exactly what delaying benefits means.
When can you file?
Most individuals who have yet to file are eligible to claim full benefits when they reach full retirement age (FRA) at 67. However, you can begin to collect benefits as early as age 62 (or age 60 if you are collecting a survivor’s benefit from a deceased spouse) – but filing early could reduce your benefits by as much as 30%.
Let’s assume your full benefit at FRA is $3,000 per month. If you begin collecting at age 62, your monthly benefit would now be $2,100 per month. This reduction is permanent and remains the basis for your annual cost-of-living adjustment as well.
In addition, if you continue to work while collecting early benefits, your monthly payment can be reduced by $1 for every $2 you earn above $23,400 until you reach FRA.
What if you wait?
Each year you delay filing beyond FRA increases your potential benefit by 8%, which is potentially higher than the average expected risk-adjusted return for an investment portfolio, making it a potential strategy for combating rising costs.
If you wait until age 70, which is currently the longest you can delay benefits, your $3000 per month benefit could increase to $3,720. In general, our recommendation is that if you can afford to wait, you should.
Making your decision
There are many reasons the decision about when to take benefits may be complicated. They may include health, life expectancy, immediate needs, and concerns about extending the life of the income stream from your portfolio. We encourage you to discuss your specific concerns with your advisor, but here are a few points to consider:
Longevity: If there is a present health concern that may shorten life expectancy, it may make sense to begin collecting earlier. By the same token, strong health and a family history of longevity may argue in favor of delaying benefits to maximize your monthly payment.
Break-even point: If you calculate cumulative payments of the early filing/lower payment benefit and compare it to cumulative payments for full or delayed benefits, you and your advisor can find the break-even point, your age at which the total payments match. After the break-even point, delaying filing translates into a greater lifetime payout.
Income streams: Many people are concerned about outliving their savings, as well as understanding the lifestyle their income streams can support. It’s critical to work with an advisor and financial planner to understand how drawing down your portfolio and your Social Security benefits can supplement each other.
Before you file
It’s natural to feel at least some level of anxiety when you first retire and no longer have the income stream provided by your paycheck. When you file for benefits determines how much of your paycheck will be replaced by Social Security and how much will need to be replaced by your portfolio.
Ideally, the years before you begin collecting benefits is the time to ask your advisor how the best way to meet current expense needs in a tax-advantaged manner and generate an income stream that is sufficient for you and your family until you collect Social Security benefits.
Whatever changes you believe may be implemented for Social Security, and whatever speculations you may have about whether it will still be funded in ten years, you will still be faced with the question of taking benefits or delaying. The sooner you begin to tackle retirement questions, the stronger your position may be.