Deciding which social security retirement option makes sense for your retirement isn’t as easy as you might think. Unfortunately, the social security retirement benefit puzzle for many pre-retirees is a bit of mess....
To better explain the considerations it’s important to note the difference in benefit ages. Traditional full benefit age is 66, but most people can actually start collecting as early as age 62, or as late as age 70. The monthly benefit amount is based on the age you start collecting. An early benefit at age 62 is about 75% of the age 66 full benefit, and the maximum benefit at age 70 is 130% of the age 66 benefit.
The decision on when to start collecting is different for everyone, and in the end is not a retirement choice that has a definitive answer. Much like life insurance, the Social Security decision includes an inherent level of speculation. That’s because none of us knows how long we’re going to live.
The obvious problem is that if someone waits until age 70 to start collecting, and dies at age 75, then they would’ve received much more money in total if they had started taking the benefit early at age 62. Conversely, if someone starts collecting early at age 62, and they live beyond their early-eighties, they would’ve received more money if they’d waited until age 70.
Given this trade off, it’s important for retirees to consider the different benefit payments along with inflation, taxes, and investment returns. This type of comparison provides break-even points that represent the number of years it takes for the early benefit to be financially surpassed by the full benefit, and for the full benefit to be surpassed by the maximum benefit.
The break-evens are: For those taking the benefit at age 62 (assuming a moderate risk investor) the point that the early retirement benefit is surpassed by the traditional full retirement benefit is age 82. For conservative investors the breakeven age is likely closer to age 80, and for moderate aggressive investors it may be closer to age 84. For someone claiming their benefit at age 66, rather than maximizing at age 70, the average breakeven is age 85, and the range is 83 to 87.
There are numerous factors beyond longevity that also include a level of guesswork. Such as: How will your investments perform? How will inflation and taxes change? How will modern science possibly advance life expectancies? Since S.S. is projected to only be able to pay 75% of its obligations in 2027, will they begin more stringent taxation, or means testing? These are all questions that can’t be answered with certainty, nonetheless, they should be considered.
So, should you maximize your social security? For most retirees of above average net worth the best Social Security option is likely to wait to collect until age 70, assuming they’re healthy, and optimistic about the future health of the USA.
For those that are healthy and in early retirement, waiting to maximize their benefit can seem somewhat counterintuitive, but consider that for every year they wait the benefit increases by approximately 8%. For those that plan to work through their 60′s, the option to wait until age 70 is likely an especially good choice since up to 85% of their benefit is going to be subject to income tax through their working years.
Another part of the SS decision is whether you can implement advantageous file-and-suspend strategies. That decision is based on you and your a spouses age and benefits. But for some couples this apparent loophole can translate to 10′s of thousands in additional benefits.
Today, there is an abundance of confusion surrounding social security benefits, but given the non-generic nature of the decision it likely should be discussed privately with a qualified retirement expert rather than wasting time attending classes or seminars.
One last point to be mindful of, most of the information found online, and in the general media, is overwhelmingly skewed toward retirees that have not accumulated much in retirement assets. The analysis and considerations change substantially for those with above average net worths.
