To Delay, or Not To Delay. That is the Question
Author: Nick Prigitano
For most people, from the time they begin work they also start paying Social Security taxes. At a young age it’s difficult to imagine collecting on the program years into the future. For many, the time to collect comes up faster than they think, and they are forced to answer the question, when do I collect? This is no decision to take lightly since the choice you make today will impact your benefits for the rest of your life. As financial advisors this is a question we help our clients with on a regular basis. We hope to give you some thoughts on the age-old question, to delay, or not to delay.
It's my money and I want it now!
After paying into Social Security for decades, it's not an unreasonable response to want to collect as soon as possible. Not to mention, all the scary headlines describing the Social Security trust fund evaporating before our very eyes. If there are concerns about Social Security being there in the future, shouldn't I collect as soon as possible so at least I get something? Now, as much as we wish that we had access to crystal balls, but unfortunately as financial advisors we don't. So, we can't speak with complete certainty about the future of Social Security. However, we find it incredibly unlikely that it will ever go away completely and if any drastic changes are made to the program, they are much more likely to affect younger workers than those already collecting, or soon to collect, on the program.
While the future of Social Security may be uncertain, we can say with complete certainty that collecting Social Security early will have immediate ramifications today. The earliest anyone is allowed to collect is at age 62 (excluding disability or a survivor’s benefit). If you do decide to collect early your benefits will be reduced for life. That's right, this one decision will affect your payments FOREVER. How much will your payments be reduced you ask? Well, it depends on how early you collect and when your "Full Retirement Age" is. The Social Security Administration explains it as, "a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month."1 In simple speak, if your full retirement age is 66 and you take benefits at 62 it's a 25% overall reduction. If your full retirement age is 67 and you take it at 62 it amounts to a 30% total reduction. A potentially steep price to pay for collecting as soon as possible.
Another factor is that there is no point to claiming benefits before your full retirement age if you are still working at a regular job. In that case your benefits would be taken back and your reduction restored.
Good Things Come to Those Who Wait . . . Sometimes
It's only fair that if you're penalized for taking Social Security early that there's a benefit to delaying benefits. Similar to receiving benefits early, the amount of the delayed increase is on a per month basis of 2/3 of 1% per month.2 This amounts to an 8% increase in benefits per year.
You may be thinking, "If I don't need the money, I could delay until I'm 80 and receive an enormous benefit!" Not so fast. The latest someone will receive delayed credits is age 70. There is no additional advantage to waiting past that age. So, even if you are still working and "don't need the money" it makes sense to still file to collect on your Social Security if you are 70 since there is no longer a benefit to delaying. It's one of the few times in life you can have your cake and eat it too (although you will have to pay taxes on the extra income).
When should I collect then?
We'll start off by saying that Social Security is incredibly complex with many nuances, rules, and regulations. We just scratched the surface in this post and for any permanent, potentially life altering decisions (like when to claim Social Security), you should speak with a financial advisor. However, as a general rule, it often makes sense to delay taking benefits until age 70. The reason being you are getting a rather large (8%) government guaranteed increase per year that is adjusted for inflation, for life. You really can't buy something like that anywhere else.
The risk of delaying benefits is that you could be hit by a bus tomorrow and never see a dime of the program you spent most of your life paying in to (although your surviving spouse may benefit from your delay). We find that risk generally much smaller than the possibility of outliving your assets. People continue to live longer and longer (not necessarily a bad thing) and new medical advances are made every day. This means that more and more people will need money longer after retirement. While delaying benefits won't guarantee a comfortable retirement for years to come, it is something that can help.
At the end of the day, you're making a bet on how long you think you will live. The longer you live, the greater the benefit there is in delaying Social Security now. If you have an illness or condition that may limit your life expectancy, and you know this ahead of time, that's one of the few occasions we find that it may make sense to claim early.3 However, many of us don't know when our time will come. So, let's plan for that worst-case scenario, a long, happy, healthy, retirement.
3 Other situations involved having dependents, or folks born before 1954