Are You Leaving Money on the Table by Claiming Social Security Too Soon?
In retirement planning, one of the most common questions we have to answer is the one above, helping people determine what is the best time to elect taking Social Security income.
This choice can be even more complicated for women who are widows or divorcees and who anticipate receiving Social Security based on their former spouse’s benefit.
Starting Social Security income first is often seen as a smart way to safeguard IRA savings. However, is it always that simple?
The answer to the above question is a very important one that has financial implications for the remainder of your life. Let’s explore some key considerations to help you develop a financial strategy tailored to your unique circumstances.
How Timing Affects Social Security Benefits
For the majority of people, Social Security income won’t cover their full expenses in retirement. This being so, the remainder of the money that will be needed to meet expenses in retirement will need to come from other sources – savings and retirement investments. In these cases, you’ll need both your investments and your Social Security income to work together for the remainder of your lifetime to meet your needs.
These two elements work together to create your full retirement income strategy.
How Should You Determine the Best Time to Start Your Social Security Income?
But how should you time triggering your SS income? The answer is: it depends on your specific situation. You can begin receiving your Social Security benefits at age 62, however that comes with a significantly reduced rate in comparison with delaying these payments. If you’re able to delay these payments past your full retirement age (FRA), which, for most, will be within age 66-67, then that income amount will continue to grow until age 70.
For this reason, delaying is often the preferred choice. Each year you wait, your income benefit increases by about 8%, which, if you live a relatively long life, can really add up.
We know that not everyone has the means to delay their Social Security income until their latest filing age, age 70. However, it’s still beneficial to consider the effects on your short-term and long-term Social Security income by taking it sooner or later.
The Social Security Breakeven Point
An optimized retirement income strategy is one where you are able to experience the highest total lifetime SS benefit. This is where the breakeven point comes into play. What is the breakeven point? Here’s a hypothetical situation to answer that question.
Example: Life Expectancy 82 Years
Let’s say you’re nearing age 62 and considering when to trigger your SS benefits. At age 62, your SS benefit will be $1,600 per month. At your FRA, age 67, your benefit will be $2,300 per month. At your latest filing age, 70, your monthly benefit will be $2,950. So the monthly income amount – that’s one factor.
Now the other factor to consider with the breakeven point – your life expectancy. Let’s say your life expectancy is age 82. Now some quick math will tell us when your breakeven point will be and thus what strategy will project the highest lifetime SS benefit.
● If SS elected at age 62: $384,000 lifetime SS income (12 months*20 years of remaining life expectancy*$1,600 monthly SS benefit at age 62)
● If SS elected at FRA (67): $414,000 lifetime SS income (12 months*15 years of remaining life expectancy*$2,300 monthly SS benefit at age 67)
● If SS elected at latest filing age (70): $424,800 lifetime SS income (12 months*12 years of remaining life expectancy*$2,950 monthly SS benefit at age 70)
Example: Life Expectancy 77 Years
We can see here that in this situation, in order to achieve the highest lifetime benefit possible from Social Security, delaying until age 70 is the preferred choice. Now, let’s use the same respective SS income amounts per age elected, but drop the life expectancy by 5 years. How does this affect your lifetime benefit amount? The same math reveals:
● If SS elected at age 62: $288,000 lifetime SS income
● If SS elected at FRA (67): $276,000 lifetime SS income
● If SS elected at latest filing age (70): $247,800 lifetime SS income
By simply dropping the life expectancy of the person in this hypothetical scenario by 5 years, we see a very different result in total lifetime Social Security income. We can see that in this case, the breakeven point falls before age 70 and even full retirement age 67. Rather, the strategy that gets you the most bang for the buck over your lifetime would be electing Social Security closer to age 62.
This scenario illustrates that the highest monthly amount and the highest lifetime amount of Social Security income are often two very different things. If you’re interested in preserving as much of your own hard-earned IRA (or other) savings and investments as possible, and if you’ll be relying on some of those savings over the course of your retirement life as well, the strategy that’s best for you may very likely involve figuring out how to maximize your lifetime Social Security benefits.
How Personal Factors Affect Social Security Timing
As we can see above, the breakeven point is extremely important in timing your SS. However, it’s also based on something unknown – your life expectancy. Therefore, an important question to consider is how should you gauge where your breakeven point will fall in your lifetime? This is where the personal factors come into play. Here are a few personal factors to consider:
Health
Do your habits and family health history lend themselves to longevity? If so, then you’re more likely able to project a longer life expectancy and so delaying Social Security income may be the wiser choice. However, if health issues due to lifestyle, family history, or other factors are a major concern, electing these benefits earlier may make more sense for you.
Retirement Lifestyle
What are your personal goals and plans in retirement? Do they involve a higher measure of spending in your earlier retirement years, perhaps for travel or other hobbies? If so, you may simply elect to draw Social Security earlier to supplement your IRA withdrawals. However, with the lower monthly SS benefit and quicker drain on your retirement savings, you may have to make drastic lifestyle changes in your latter retirement years to compensate for this higher spending and lower lifetime SS income.
Marital Status
If you’re married and you are the higher earner in the household, delaying Social Security income can increase the survivor benefit your spouse would receive in the case of your passing. This could be especially important if other income sources will disappear or be reduced in the case of your passing, such as a pension or small amount of earned income.
A careful consideration of these factors as it relates to your personal circumstances, along with your own personal preferences can help you to make an informed decision.
Social Security – A Cog in a Larger Machine
By making an educated decision regarding Social Security based on your own personal circumstances, you’ll put yourself in a position to maximize your lifetime income benefit, and thus enjoy an optimized Social Security strategy.
This article details just one of the factors to consider as it relates to electing Social Security – timing. However, there are other factors to consider, such as how Social Security income combined with IRA withdrawals will affect your retirement taxation. This is why an optimized SS strategy is just one element of a larger strategy. This larger strategy is what makes up your retirement plan.
If you’d like to find out your optimized Social Security strategy and how it should best fit into your retirement plan, CLICK HERE to speak to one of our experienced advisors. We’ll review your financial situation and provide clear, tailored guidance on whether delaying SS or taking it sooner is the best choice based on your financial position, age, and personal goals.
Let’s Have a Conversation:
At what age did you claim Social Security? If you haven’t done so yet, what age are you looking toward for claiming your benefit? How did you decide the best age for your circumstances? What other questions do you have regarding Social Security?
Fortunately, I have always been a frugal person. I have chosen to wait until I am 70 to draw my SS benefits. I grew up in extreme poverty, so I knew it was a whole lot harder to be poor while very young or old. I have a good pension as a teacher. It is a true pension that I will receive until death. (Now the school system has gone to a 401K system which can run out long before the retiree dies.) I retired at 53 with my 30+ years of service but worked as a tutor for a non-profit part-time. (I was not eligible for investing in their retirement, but I saved all my earnings from that position.) Next October I will begin drawing my SS. I know people who began drawing at 62 and will have to work until they die because they do not draw enough to live on and they foolishly did not join the 401K program offered by their employers. They say I am so lucky; luck had nothing to do with it: it was all planning and preparing for the future. I worked all through high school and college (sometimes two jobs at a time) and earned excellent grades to qualify for scholarships. I purposely looked for a job with a secure retirement system, contributed to a 403B, and married a man with similar goals. Since retiring we travel and pursue our interests. As I said earlier, it’s awful to be poor when young or old when you cannot work to improve your lot because of your age. Now when I take short term jobs, it is because I WANT to and not because I HAVE to in order to live. We have encouraged our children to think of their retirement while they are young. Hopefully, they will apply those principles to their own financial futures.
62 & never looked back!
Money isn’t everything – you have to be alive to enjoy it & tomorrow is not guaranteed.
The years we’ve enjoyed our non-working freedom have been worth more than anything.
I agree! I took it at 65 because working any longer would have driven me crazy. Besides, regardless of family history, etc. none of us knows what’s around the corner for our health or for anything else. Yes, it’s less money now than waiting another 5 years, but I’m enjoying my freedom too much to ever regret jumping ship early.
If you’re able to do it and it gives you the ability to enjoy that freedom longer, that’s great, because you’re right on both accounts above!
I’m 64 and my plan is to start collecting SS next year. I made that decision due to what happened with a close family friend. He waited until he was 70, but he was unexpectedly diagnosed with bone cancer just a couple of months after retiring, and received only two SS payments before he died. It was sad that he didn’t get to enjoy that extra income while he was still healthy. His situation made me decide not to wait much longer because, although I’m fine now, I could really use the extra money now and I have no idea of when I’ll leave this earth.
I’m very sorry to hear about your friend, and can completely understand your reason for electing your benefit when you are!
Sadly we have no idea what will happen to SS after Jan 20th. A lot of folks don’t seem to understand the changes that could happen to hurt us.
Yes: there are apparently plans in the works to cut our benefits already (a proposal in the House of representatives) so that’s a real problem.
Definitely always important to consider future changes, even if we can only act on current information. If important changes do materialize, there’s a great chance I’ll circle back here to this community to detail them. Thanks Cathy!
There is longevity in my family. Plus my plan is to wait till I’m 67-70 to start drawing on SS because I will work till then (I know circumstances beyond my control can throw a wrench in this plan). I want as much SS as possible.
If your plan is to work until then and your income is enough to meet your current needs, then it certainly seems delaying your election is the right choice for you. When you leave work, that choice to delay may give you a slight boost in quality of life, whether it’s your home life or activites you enjoy. Thanks Lee.