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Not So Fast: Why You May Want to Wait to Claim Your Social Security Benefits

Rebekah Barsch •  August 13, 2014 | Enjoying Retirement, Your Finances

When should you apply for Social Security benefits? In my experience, that’s a simple question with a not-so-simple answer. Deciding when and how to claim Social Security is an important decision that can have a significant impact on the amount of money you ultimately receive.

You can start to collect Social Security as early as age 62; at full retirement age (FRA), which depends on when you were born; or as late as age 70. Many people find it tempting to take Social Security as soon as they’re eligible. I get why people want to do this. When you’ve been paying into the system for umpteen years, you want to be sure you get the benefits you deserve. But as I tell anyone who is contemplating this move, there’s a tradeoff to taking your benefits early.

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It Can Pay to Wait

For starters, claiming Social Security before reaching your FRA means you’ll see a permanent reduction in your monthly benefits, which could equal as much as 25 percent. It also means that any cost-of-living adjustments (COLAs), which are based on your benefit amount, will be lower, too.

In contrast, if you wait until age 70, your benefits will be increased by a flat 8 percent each year you wait to collect until age 70. This so-called “delayed credit” can help boost your retirement income over time. Let’s see how much.

Say you’re retiring at age 62 this year and earn $100,000. You could collect about $1,616 a month as a single person if you claim at age 62 or $2,217 a month (in today’s dollars) if you waited until your FRA in 2018. Hold off until age 70 and your monthly benefit would grow to $3,017. That’s an 86.7 percent increase in monthly payments over claiming at age 62, not counting any COLA increases you might have gotten along the way. You can get both a quick estimate of your monthly benefit and a more precise one using your actual earnings history on the Social Security website.

Even with this, a majority of all eligible workers choose to take Social Security early. A friend recently said to me: “I don’t know how long I’m going to live, so why delay my benefits one day longer than 62?” The problem is that many people tend to underestimate their longevity. In reality, there is a 50 percent chance that a 65-year-old man today will live beyond age 87 and that a 65-year-old woman will live beyond age 90. If they are married, there is a 50 percent chance that one of them will live past age 94.1 The greater your chance for living a long life, the more important it becomes to maximize your sources of retirement income, including Social Security.

It’s a Big Decision

So how do you decide whether you should take your benefits at 62, FRA, or after? I’ve found the following questions can help you better understand which option is best for your situation.

1. Are you still working? If you’re still able and willing to work, you may want to wait until you reach FRA or later to claim your retirement benefits. Assuming your wages have increased over time, this will enable you to boost your final Social Security payment amount, which is based on an average of your top 35 earning years. You can find a personalized comparison of your retirement benefits at age 62, FRA, and at age 70 on the Social Security website.

2. Do you have dependents? If you have minor children, their dependent and survivor benefits may be reduced if you claim Social Security retirement benefits prior to your FRA, and later something happens to you.

3. How’s your health? If you’re reasonably healthy and believe you stand a good chance of outliving at least half of your fellow Americans the same age, you may want to delay taking Social Security to maximize your monthly benefit amount.

4. What’s your “break-even” point? Whether you opt to start receiving benefits at 62 or sometime later, you have a “break-even” age—the point after which waiting to take your benefits pays off. Your personal break-even point will depend on a number of factors, including your date of birth and whether you’re the working or non-working spouse. For example, if you’re a single person age 62, and you choose to wait until age 66 to take your benefit, your break-even age would be around age 78. If you choose to wait until age 70 to take your benefit, your break-even age would be around age 82½.

An experienced financial professional can help you calculate your personal break-even age. Generally speaking, the younger your break-even age, the more likely it is that collecting benefits at age 62 will work against you, since taking early Social Security means you’ll need to live longer on a smaller benefit amount.

5. Are you married? Don’t forget to take your spouse’s age, health and work history into account as you consider when to begin receiving Social Security. Generally, the higher-earning spouse should wait as long as possible to begin taking Social Security. That’s because the higher your pre-retirement income, the higher your partner’s spousal and/or survivor’s benefit will be.

The Bottom Line

There are many factors to consider when deciding when to take Social Security. Before making a decision that could impact your financial well-being throughout 30, 40 or more years of retirement, speak with an experienced financial professional. Remember, Social Security is a lifetime benefit. Maximizing that benefit will allow you to hold onto more of your other retirement savings. That’s extra money you could use to meet your expenses, enhance your lifestyle or spoil your grandkids.

Additional Information:

1Annuity 2000 Table with mortality enhancements determined using projection scale G2.

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