Should you take your Social Security benefits at age 62, full retirement age or even age 70? As a financial planner and Registered Social Security Analyst (RSSA), I can honestly say that there is no one right answer to when benefits should be taken. The answer to that seemingly simple question is far from simple to answer; in fact, it can be one of the most complex answers you face in your retirement. Let’s look at some of the things to consider when you face the decision to take your benefits.
Yes, you can claim your benefits at age 62 for early retirement at what will be at least a 25% discount from your full-retirement age benefits. And over 50% less than what you could expect at age 70 after your benefits are increased 8% per year plus the cost of living adjustments. But not everyone can wait until they turn 66 or 67 for Gen X and later generations. On the whole, people have not been saving in sufficient terms to fund their retirement unless they also tap into their benefits from Social Security.
The longer you can delay taking your benefits can be a return, unlike one you can achieve in the markets because these are permanent adjustments to your future income stream. But nearly 60% of retirees decide to claim their benefits before reaching their full retirement age, currently 66 for most Baby Boomers. And about a third of these people end up taking their benefits at age 62. Does that mean that they are wrong or made an incorrect choice? The answer to that is, it depends.
The answer of when to file for your benefits can be nearly impossible to answer, and that is where I can assist you in making this decision be using proprietary software that analyzes thousands of possible filing strategies to find the one that maximizes you and your family’s benefits. Many people look at their break-even as the way to decide when to file, and that is one approach but maybe not the best to use as no one knows when they will die. Looking at the bigger picture is better as there are many factors besides age that should go into your decision. If you have a family that has a history of long lives, you will use that as part of your decision making, but it is not all that needs to be considered.
Another aspect that you need to consider is will you still be working before your full retirement age. If you are still working in 2019 and have filed for your benefits, they will be reduced by $1 for every $2 you make over $17,640 and $1 for every $3 you make over $46,920 in the year you retire. Once you reach full retirement age, there are no income limitations on what you can earn. But if you do file for your benefits early and are working, you do not lose the penalties that Social Security imposes as they will be added to your benefits when you do reach full retirement age. But if you are going to work still, it is best not to work full-time and delay filing.
If you do decide to file for your benefits, you have only a 12-month period in which you can change your mind. That is a change that went into effect several years ago. Before that change, you could elect to file at age 62 and repay the full amount to enjoy the higher benefits. Now you must make that decision within 12-months, or you are forever going to get those as your benefits. Some people think that they can invest the funds and repay them a little later but that more than often is not a simple thing to do. If you invest the funds and the market turns south; you may be without the full amount to repay what you were paid. And then, most people cannot save 100% of what it is they were paid as we all have to live on some savings or benefits paid.
If you are some of the lucky ones who have a pension from previous employment delaying your benefits will be easier than for someone who does not have that source of income. Are you someone who did plan and save for retirement in either Individual Retirement Accounts (IRA) or workplace 401(k) plans you face the issue of Requirement Minimum Disbursements (RMD). If you were ahead of the game and saved while you were working, you can retire and supplement your lifestyle with withdrawals from these accounts until you reach the point where you start collecting your benefits. And to be honest, if you delay your benefits, the proceeds will most likely be more than if you stayed invested in the markets as the proceeds will be permanently adjusted for the rest of your lifetime.
Say you do have savings to live off of while you are waiting to begin your benefits and the markets turn south, and we experience another year like 2008 and 2009, and we face a recession. In that case, you would most likely be better off claiming your benefits and letting your investments recover sufficiently to begin withdrawing funds again. Why is that? Well, once you sell an investment in depressed market conditions that losses become permanent. While the same is true with your benefits, it may be better to elect to take your benefits as compared to selling investments in a depressed state. Again, this is where an RSSA and financial planner can assist you in what may be the better of the options that you face.
While investing and saving for your retirement can be done with little fanfare, it is best to seek the guidance of someone when you are putting everything together and are thinking of starting your Social Security benefits. Social Security is extremely complex and difficult for even the most sophisticated person. If you are nearing retirement and need assistance, do not hesitate to reach out to me for assistance or another fee-only fiduciary financial planner.
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