Many of us have a love-hate relationship with Social Security. We hate that we have been paying into the system our entire lives. We love that it almost feels like free money…even though we have paid into it our entire lives. So, what do you need to know about the system…especially if you have not yet elected to begin your coverage?
First, you need to understand that the entire Social Security system is a giant math problem. It is math that allows the experts to tell us that the plan may run out of money. It is also math that dictates the amount of monthly income you can receive based on the age at which you start that income. You can elect to receive a reduced income stream starting as early as age 62. You can defer your start date as late as age 70. If you defer past 70, you will receive no benefits so there is never a case in which you should wait longer than your 70th birthday.
Let’s say you work until your 62nd birthday. Now you have a choice: start taking benefits right away (assuming you are eligible) or defer until later. To determine your income level, some smart mathematician took the pile of money inside your hypothetical Social Security account, made an assumption on how many years you will live, and then calculated how much you could siphon off each month in order to use up all of your money during your lifetime. Using this logic, you should receive about the same amount of money whether you choose an early income stream or you wait until age 70 to start as long as you die when you are supposed to. The problem is that we rarely die the day we are supposed to and there are other considerations that you need to factor into your decision.
What are some reasons that you should take it early? If you choose to start benefits at age 62, your monthly income will be reduced to as low as 70% of your full retirement benefit (the amount that you could receive at your full retirement age). If you strongly believe that the system is in shambles and will go away then you might as well start getting your money out. Another reason could be that if you know your life expectancy is shorter than others, it might make sense to start your income early.
You may, however, want to delay starting your income. The most obvious reason is to increase your monthly benefit. Each year that you delay past your full retirement age increases your monthly benefit amount by 8%. That is a pretty nice increase. Where else can you get a fairly conservative 8% return on your money? Waiting could increase your total benefit up to 132% depending on what year you were born.
The most important thing that you should take into consideration, especially if you are married, is that your decision is not just about you. I find that most people make the mistake of trying to figure out how to maximize their benefit over their lifetime. When should “I” start collecting benefits? The problem is that you need to think about it another way. When should I start collecting benefits so that “we” collect the largest amount over “our” lifetimes? One of the pretty neat features of the system is that when a spouse dies, the surviving spouse will receive a monthly benefit equal to the greater of the two incomes (as long as the spouse is also eligible to receive Social Security). This one fact alters the mathematical equation that I mentioned at the beginning…and it can make the numbers more favorable for you. You see, the life expectancy for you as a couple should be greater than yours as an individual. If you are the primary wage earner, and you can delay until age 70, you in a sense are locking in the higher benefit not just for your life, but for the joint life with your spouse. This can increase the likelihood that one of you lives beyond the life expectancy date that was used to calculate the benefit in the first place. Score a point in your favor!
While there is no clear cut answer for everyone, we find that in most cases there is some merit to waiting longer to start your benefit. Every case is different so you need to look at your situation closely. Check the footer for a way to set up a free call to review your benefits. Remember, it is not just about “you”.
Want some help with your overall financial plan? Go to http://doingmoneyright.com/cbc to set up your FREE, one-on-one, Confidence Booster Call. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director with Ellis & Ellis, a division of United Capital Financial Advisors, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances.