When to Take Social Security – the Six Figure DecisionAugust 15th, 2019 by Jim Allen
According to a recent research study, U.S. retirees would be able to generate an average of $111,000 more per household over their lifetime by choosing the optimal Social Security claiming strategy. Because most people choose to take Social Security early, they are potentially leaving over $111k of benefit (or even more) on the table over their lives. Making the right decision about when to take Social Security is one of most important decisions people nearing retirement will make.
Social Security benefits are available as early as age 62, but are meant to be started between ages 66 to 67 depending on the year you were born. That is what is called “full retirement age.” For each year you take it earlier than full retirement age, your benefit is reduced and the total reduction can be as much as 30% for claiming at age 62. The reduction is permanent, meaning you will receive the reduced amounts for as long as you live. It is very common for Social Security benefits to be started early, typically for one of three reasons:
1. You need the money due to forced early retirement because of health or layoff.
2. You don’t think you are going to live all that long and so want to get as much benefit as you can.
3. You feel that Social Security is going to run out of money and you will lose your benefits.
Usually, if the wrong Social Security claiming choice is made, it is because benefits are turned on too early. As the study shows, on average people would have had about $111,000 more to live off in retirement had they made the right choice. The decision isn’t just turning it on at full retirement age or earlier, there is also an option to delay taking your benefits all the way out to age 70. While benefits are reduced if you take them early, they are increased if you delay taking them. For every year you wait after full retirement age, your benefits increase by 8% each year up to age 70. This means that if your full retirement age is 66, at age 70 your benefit would be 32% higher.
Here’s an example – Fred’s benefit at his full retirement age of 66 would be $2,500 per month. However, if he starts at age 62, his benefit is reduced 25% to $1,875 per month. But, if he waited until age 70, his benefit is increased to $3,300 per month (32% higher). So Fred’s benefits can vary between $1,875 per month and $3,300 per month depending on when he turns them on.
The tricky part of this decision is that you don’t know how long you are going to live so you don’t know how much you will receive over your lifetime. So, is it better to claim at 62 and get an additional 8 years of $1,875 per month? Or, would Fred be better of waiting until 70 and getting $3,300 per month but giving up those 8 years of reduced benefits?
Let’s say Fred lives to age 72. By turning on early, he would have received $225,000 before he died. But, if waited until age 70, he would receive only $79,200. Claiming early is the clear winner here. But what if Fred lives to his life expectancy of 85? If he claims early, he would receive $517,500 over that time (ignoring any inflation increases as they would apply to any claiming age). If he waited until age 70, he would receive $594,000. That’s almost $76,500 more in benefits by waiting. If Fred lives to age 90 the benefit of delaying is over $160,000.
Of course, Fred could also turn on benefits any time between 62 and 70 as well, meaning there are a multitude of choices available. If Fred were married, then the decision becomes even more complex and the choices are multiplied even more.
As you can see, the right or wrong decision can mean as much as six-figures or more of additional income available or lost over your retirement years. Not only are the financial stakes high, but the decision is complex and is also irrevocable. Deciding when to take Social Security requires careful analysis and coordination with your overall financial plan. At Anchor Bay Capital, we are experts in the area of Social Security and retirement income planning. If you would like to learn more about getting the most from Social Security, we are offering educational seminars in Carlsbad and Fountain Valley in September. Please visit our website for more information about these free community events.