Social Security — Sooner or Later?
A question I often receive from someone approaching the age at which they can start receiving social security benefits is "should I go ahead and begin taking benefits now or wait until later?
It's a valid question. Most people know, on the one hand, that social security benefits end when you die, while on the other, waiting produces a higher monthly benefit.
The thinking typically takes two courses.
One says that, just in case you die prematurely, you should start earlier so you at least know you will receive back some of what you paid in to the system, and you may have a better chance of receiving back everything you paid in (or even more) depending on how long you live.
By contrast, the other line of thinking is that if you wait, the higher monthly benefit could maximize your income and provide you a higher standard of living, again depending on how long you live.
To give you an idea the effect of this decision, let's look at a scenario. Let's say you are now 64. Your full retirement age is 66. No one would think a thing about you deciding to jump in and receive the benefits you have coming when you reach 66.
But what would happen if you wait until age 70 to start taking those benefits? By deferring, your monthly benefit will jump to 132% of what you would receive at your "full" retirement age due to the delayed retirement credits that will be earned.
Think about that; by waiting a mere 4 years, you will have increased your benefit at an annual rate of about 7.5%. Not a bad return, all other things being equal!
Of course, rarely are "all other things equal", and unfortunately, known of us has that proverbial crystal ball that allows us to look ahead and tell with certainty what will benefit you and your family the most.
There is, of course, no catch-all, one-size-fits-all answer. Many factors enter into the decision process, such as marital status, special family situations, your health condition and that of your spouse if you have one, other sources of income, etc.
As a financial advisor, in most circumstances, I typically recommend that you wait until age 70 to file for Social Security benefits, if your income will allow you to do so. The higher benefit helps you manage longevity risk as I see it (i.e., the risk you could outlive your money), so there is value in taking advantage of the delayed retirement credits when you don't need the Social Security benefits for income prior to age 70.
Further, if you delay, the annual cost-of-living benefit adjustments will be made on a benefit base that is 32% higher than the amount that you would receive at your full retirement age, making this strategy even more potentially beneficial.
To get technical for a moment, the Social Security Administration did a study comparing the total dollar benefits you receive when you apply for benefits at different ages. Not surprisingly, it found that: "If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between."
I suppose this is as it should be, playing the law of averages.
There is one rather unique situation where a variation of the above may be in order, that being if you potentially qualify for benefits based on the work record of an ex-spouse. Let's say you are a woman and you were married, but are now divorced. Further, you have not remarried.
It is possible that at your full retirement age of 66, you could claim a spousal benefit based on your ex-husband's benefit record, again assuming that you haven't remarried. You could receive a benefit equal to 50% of what Social Security calls your ex-husband's "primary insurance amount"; in other words, the benefit he would receive at his normal retirement age.
Further, you will continue to earn delayed retirement credits on your own work record, all the while still receiving the spousal benefit. This provides you with spousal social security benefits from age 66 to 70.
Then, at age 70, you will receive benefits based on your own work record that will be much higher than what you would have qualified for at age 66. Viola, extra money in the bank!
A final thought; don't forget to file for Medicare benefits at age 65, if appropriate, which may depend on whether any work related health insurance coverage you have continues past age 65.
Lane Keeter, CPA, is the Managing Partner of the Heber Springs Office of EGP, PLLC, one of Arkansas's leading full-service CPA and consulting firms.
