Managing Your Money

Waiting to claim Social Security is often the smart choice

By a very wide margin, most people begin taking their Social Security benefit as soon as they become eligible -- but is that the smartest choice? Likely not. In fact, waiting as many years as possible -- ideally until age 70 -- can pay off in a big way. That is because there is a roughly 8 percent increase in a person's Social Security benefit each year that they delay taking benefits. For example, if someone is turning 66 this year and is eligible to collect the maximum benefit, they would receive a monthly benefit of just over $28,000 per year. However, if they waited until age 70 to collect, the benefit would increase to over $37,000 per year. That is an increase of over $9,000. That's a pretty big increase, especially when you consider that Social Security may be the only "guaranteed" and inflation adjusted income stream that many retirees have now that pensions are far less common.

So, if waiting can result in a much bigger benefit, why do so many people still opt to take benefits early or at least at their Normal Retirement Age (NRA)? For some people, there may be no other option. They may have not saved enough for retirement and simply need the money sooner rather than later. However, there are a fair number of people who could "afford" to wait to claim benefits but still opt to take their benefit early. Most people make that decision based on a breakeven analysis of some sort. Typically, they will calculate how much money they will forgo by not claiming benefits (monthly benefit available at NRA times number of months not taken -- 48 if you wait until age 70 to claim benefits) and then they divide this number by the increased benefit they will receive. For most people, the breakeven analysis indicates that the person will have to live until they are in their 80s in order to break even. Many people are too quick to assume that they won't live that long and they take the benefit early. However, that is really too simple an analysis. In order to make a truly informed decision, one needs to consider tax rates, inflation rates and marital status.

Marital status is often not considered but it really needs to be because if a high wage earner dies, his or her benefit can be assumed by a lower wage earning spouse. For example, a 70 year might want to take his or her benefit early because he or she doesn't expect to live past their early or mid 80s but the real question is how long the surviving spouse will live (if that spouse has a lower Social Security benefit). If the surviving spouse is 5 or 10 years younger, the odds are probably pretty good that they could be receiving benefits based on the older spouse's record for a very long time - decades perhaps. Similarly, if inflation is running high or the rate of return that can be earned on investments is comparatively low, deferring a benefit can really pay off.

The point is that deciding when to take Social Securiy benefits requires a lot of thought and analysis. Be sure to consider all the factors and avoid making the decision based on a single-life breakeven analysis.

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