As I’ve been reading the Retirement Interviews it seems there are a disproportionate number of comments and thoughts around how the retirees address Social Security.
I’m interested in this as well because it’s 1) a complicated subject and 2) something I don’t know much about.
Then in the midst of my wondering about SS, a reader sent me his thoughts on the subject (unsolicited) in a few detailed emails. Add to this that I’ve been reading a couple books on it (highlighted below).
So, needless to say, it’s been on my mind.
In particular, I’ve been intrigued by the conventional wisdom around taking Social Security. As you might imagine, I’m not big on conventional wisdom when it comes to money, so I’ve been considering alternatives.
But I’m getting a bit ahead of myself. For now, let’s start with the basics…
The Social Security Rules
The rules for SS are vast and complicated, so we’ll deal with basics or this post will be 2,000 pages long.
Here are the highlights from the Social Security Administration (SSA):
You can start your Social Security retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit amount.
If you start your benefits early, they will be reduced based on the number of months you receive benefits before you reach your full retirement age. If your:
- full retirement age is 66, the reduction of your benefits at age 62 is 25 percent; at age 63, it is about 20 percent; at age 64, it is about 13.3 percent; and at age 65, it is about 6.7 percent.
- full retirement age is older than 66 (that is, you were born after 1954), you can still start your retirement benefits at 62 but the reduction in your benefit amount will be greater, up to a maximum of 30 percent at age 62 for people born in 1960 and later.
If you work after you start receiving benefits, we may withhold some of your benefits if you have excess earnings. However:
- we have a special rule that applies to earnings for one year. The special rule means we cannot withhold benefits for any whole month we consider you retired, regardless of your yearly earnings.
- after you reach full retirement age, we will recalculate your benefit amount to give you credit for any months in which you did not receive some benefit because of your earnings.
One term that we’ll use a bit in this post is full retirement age (FRA) and is detailed here:
It varies by when you were born, but the basic ideas are:
- If you retire at your FRA, you get 100% of your retirement benefits.
- If you retire before your FRA, you get less than 100% of your retirement benefits.
- If you retire after your FRA, you get more than 100% of your retirement benefits.
These are the basic choices we all have and the crux of what we’ll be discussing today — when is the best time to take Social Security?
The Best Time and Conventional Wisdom
Given the above, the choices are to take Social Security early, on time, or late.
For the purpose of this post I’ll define “early” as “as soon as possible” and late as “age 70”.
Given these options, which is best?
As with almost every personal finance question, the answer is “it depends.”
It depends on a whole host of factors that are unique to each person. That’s why this is one case (like taxes for me — when I use a CPA) when you might want to get some advice that takes into account your life circumstances, goals, etc.
But for today we’ll generalize and try to get an answer (or at least a close estimate) that works for most people.
That said, there is certainly a pretty standard answer of when to take Social Security by most, so much so that it qualifies as conventional wisdom.
I knew this was the case but to prove it to myself I went to Google and typed in:
“is it better to take social security early or later”
Here are some of the top responses by a who’s who of American financial entities…
Financial advisors generally recommend that you hold off on claiming as long as you can. Admittedly, that can be a gamble.
“You’re always betting you’ll live longer and get more money,” said Geri Eisenman Pell, CEO of Pell Wealth Partners at Ameriprise Financial. “The government is asking us to make a calculated risk decision on something we’ve been mandated to pay into and take a risk on the back end.”
It only makes sense to put in for benefits early in limited circumstances, said John Piershale, wealth advisor at Piershale Financial Group.
“If you’re going to take it at 62, if you’re single and you’re terminally ill and you know you’re not going to live very long, then you might go ahead and file early,” Piershale said.
Most other situations don’t make sense to claim early and take that permanent reduction, according to Piershale. Say you know you won’t live a long time, for example. If you’re married, claiming early could lessen the amount of benefits your spouse will have access to once you’re gone.
If you have a choice and are in good health, think seriously about waiting as long as you can to take your benefits (but no later than age 70).
For retirees in good health, a long retirement, coupled with uncertainty about markets and inflation, are the biggest risks. Delaying Social Security, if you can, is effectively an insurance policy against those challenges.
Optimum strategy: put it off. Generally, it’s best to postpone Social Security benefits at least until you reach full retirement age, which is determined by the Social Security Administration.
There are instances where taking early benefits pays off despite the reduced monthly check, Neiser says.
“No one can predict how long you’ll live, but if you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate,” he says.
If you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits.
For every year you delay past your FRA up to age 70, you get an 8% increase in your benefit. So, if you can afford it, waiting could be the better option.
Health status, longevity, and retirement lifestyle are 3 variables that can play a role in your decision on when to claim your Social Security benefits.
BTW, Fidelity has this very slick widget that can help you decide what to do. I put in my assumptions and it told me to wait, with the difference in earning being almost $300k for waiting.
The Washington Post:
The conventional advice about when to take Social Security is try as hard as you can to wait. Don’t take it at 62, many experts say. If you can hold off, don’t even take it at your full retirement age. Delay until you’re 70, and you get more money every month. And since many people are living longer, the extra money might be needed, most likely to pay for health care expenses not covered by Medicare like long-term care assistance.
In Get What’s Yours: The Secrets to Maxing Out Your Social Security they list the following as #1 in their “three general rules to maximize your lifetime benefits”:
Rule 1: Be patient. Take Social Security’s best deal by waiting to collect for as long as possible — taking much higher benefits over somewhat fewer years when it pays to do so.
You can file for retirement benefits as early as age 62. However, there are significant reasons to wait.
I could go on and on, listing one name brand site after another recommending that it’s generally almost always best to delay taking Social Security for as long as possible.
But not everyone thinks that…
The Take It Early Camp
A few have broken ranks with convention wisdom and suggest that taking SS asap is the best option.
Back to The Washington Post piece noted above:
My husband and I are in a great debate about when to start collecting Social Security.
I want to delay getting benefits until we are 70. We both reach full retirement age at 67.
“Nope,” my husband says. “I’m going to take it early at 62. Why wait all those years when we could use the money to travel or do whatever we want during our healthier years?”
My husband did a spreadsheet and it showed that while delaying until 70 would net us more money every year, the break-even point — where we would catch up to all the cash we missed out collecting early at 62 — was about 79.
“Tomorrow isn’t promised,” he argues. “There’s no way to tell about our vitality at that age.”
Then there’s the Motley Fool:
At first blush, the extra amount that can be received by waiting to claim until 70 appears to make waiting the smartest decision. However, it’s important to remember that the amount that is paid out in benefits over a lifetime is calculated to be the same, regardless of what age you claim.
Therefore, delaying when you claim until 70 may produce bigger checks than claiming early, but it also results in the typical recipient collecting fewer checks in their lifetime than if they claimed early. Obviously, if you have longevity in your family tree, waiting could allow you to come out ahead, but assuming the average person’s life expectancy, collecting more, smaller checks might be best, especially if you can invest some of that money.
For example, the following chart shows the various break-even points associated with claiming at 62, 66, or 70 for someone who is set to receive $1,000 at their full retirement age of 66. Waiting until 70 doesn’t break even with claiming at age 62 until the recipient hits their late 70’s. If someone claims at 62 and invests some of their benefits, this break-even point could get pushed even further back.
Hmmm. Now this is getting interesting.
Take It Later…Or Early
The nice, short, informative book Social Security Made Simple bridges the take it early versus take it late debate by offering the following general guidelines…first for taking it later:
The longer you expect to live (or the more worried you are about running out of money if you do live to have a long retirement), the better it is to hold off on taking benefits.
They also offer this pertaining to married couples:
From a breakeven perspective, for it to be advantageous for the higher-earning spouse to delay his/her retirement benefit, only one spouse needs to make it to the breakeven point. As you can imagine, this often means that it’s a very good deal for the high-PIA (primary insurance amount) spouse to wait until age 70 to claim retirement benefits.
On the other hand, the book offers this as a potential case for claiming early:
The higher the after-inflation rate of return you can earn on your investments, the better it becomes to take Social Security early, so you do not have to spend down your portfolio as quickly. As a result, if inflation-adjusted interest rates are very high, you may be better off taking the money early.
The book notes that the total life expectancy at age 62 is 82 for a male and 84.8 for a female. This makes the breakeven investment return to take SS early between 1% and 3%.
Food for thought.
Take It at FRA
Not to be outdone, I was sent the following by Bob Johnson, an ESI Money reader, who suggests Social Security should be taken at FRA.
Here is an idea to consider if you are still working as you approach full retirement age (FRA) for social security.
Take advantage of the loosened rule for earnings in your FRA!
Most of us still working as we approach FRA are doing so because we have to. We are not yet in a position to retire comfortably, and the earnings restrictions imposed on social security before FRA are draconian: for every $2 earned above $17,640 (in 2019), $1 of our social security benefit is reduced. So we keep working.
The rule changes for the better in the tear of FRA: For every $3 earned above $46,920 (in 2019), $1 of our social security benefit is reduced.
Most of the chatter on the internet implores us to delay our social security benefit for as long as possible, touting the extra 8% per year the benefit will increase. What these well-meaning bloggers fail to appreciate is that most of us are not in a position to deplete our savings for 3 – 4 years to gain an extra 24% – 32% in our ultimate social security payout. We are painfully aware that we will be receiving $0.00 in social security for that same 3 – 4 years.
These two stark choices are where the discussion ends on the internet. However, there is another strategy to consider. It works best for people in the following circumstances:
- Still employed
- Planning to work through FRA
- In a position to save extra money rather than spend it
- Eligible for a tax-sheltered savings plan (401(k) 403(b), 457, etc.) at work
While you are still working in your FRA before you reach your birthday, you are eligible to earn up to $46,920 (in 2019) without disturbing your social security eligibility.
Here is the idea:
- Start receiving social security in January of your FRA — This will involve a permanent reduction in your benefit of up to 6.1%
- Roll an amount equivalent to your monthly social security payment into your 401(k) program – You will be allowed to contribute up to $38,000 to your savings plan in your FRA year,
- Continue this through your birthday, or even beyond.
Most of us who are still working at this point need to make, spend and save the money we earn. An extra amount in our tax-sheltered savings account would be a meaningful boost to beginning retirement.
Internet blogs are usually disdainful of the practical monetary needs of retirees. It is a hardship for the average retiree to forego the average monthly social security benefit for any period of time. It is also difficult for the average retiree to accumulate any meaningful savings. This makes whatever savings a person is able to accumulate before retirement that much more important.
We are discussing a modest, rational trade-off: creating a savings account at the expense of a small percentage of the retiree’s monthly benefit.
So you have another choice to consider. It requires some active money management on your part – get used to having to do it!
Only you can decide whether to enhance your savings at the expense of social security cash flow. But now you know how to, if you so choose!
Good luck and best wishes for your retirement!
Getting Professional Thoughts
In addition to the research and thoughts above, I wanted to get some advice from people who deal with this question every day.
I happen to have two good blogger friends who are financial planners (don’t gasp!) and manage this issue quite a bit.
So I sent them a note asking them to contribute.
I asked them to send me the following:
- Your answer to the question “When is it the best time to take SS?” You can say “Early in this case but later in these cases” if you like, just don’t say “it depends and leave it there with no explanation — tell us what it depends on and how to decide.”
- Your thoughts on the concept of taking SS early, investing it, and letting it compound. Could this be as good as (or close to) waiting until much later to take it? Why or why not?
We’ll begin with thoughts from Fred Leamnson who writes at Money with a Purpose:
I’ve been a financial advisor for over thirty years. I work with people who are nearing or in retirement.
One of the things I help retirees with figure out is when and how to claim Social Security. It’s something too many people take lightly.
The best time to claim Social Security depends on many factors.
1. Marital status:
- If you’re married, you want to see if you qualify for spousal benefits. If you do, you should consider using it. A spousal benefit is ½ the primary workers PIA (primary insurance amount) if started at full retirement age (FRA). To qualify, the primary worker must have filed for benefits. The file and suspend option is no longer available. The spouse must be at least age 62. If he/she files before reaching FRA, a reduced benefit will apply. There are no delayed credits on spousal benefits.
- Divorced – If divorced, you may qualify to draw a spousal benefit (as described above) on your divorced spouse’s benefit. The same rules apply as on how to apply. Additional rules apply. You must have been married for ten years, or more, the spouse receiving the benefit must be unmarried, the ex-spouse must be at least age 62. If the divorce was longer than two years ago, the ex-spouse does not need to have applied for benefits.
2. Financial condition:
One of the most legitimate reasons for claiming Social Security early is out of financial need. Many people have to retire before they are ready due to their jobs getting eliminated, health, and many other reasons out of their control. In that case, claiming early may be the best option.
That said, you should still analyze your options, especially if you’re married. You may be eligible for spousal benefits. It may make sense for your spouse to apply and for you to wait. Don’t rush to make the decision. Look at all of the options first.
3. Life expectancy:
We are living longer than ever. When we’re planning for income in retirement, we should take that into consideration. My advice to clients is to always calculate living several years beyond what the life expectancy tables say. Why? It’s much easier to adjust income up than down. If we plan for a shorter life expectancy, set up an income based on that timeline and live longer, we may run out of money.
Healthcare expenses increase as we get older. Maximizing income so it lasts beyond what we expect allows us flexibility in our later years.
The Social Security claiming decision is an important part of the calculation. If we delay claiming until, say, age 70, our benefit increases by 8% each year. If our FRA is age 66 and our PIA is $2,000, waiting until age 70 increases our benefit to $2,640. The number does not include inflation. If inflation continues (which it historically always has) the benefit continues to increase every year with inflation.
Social Security is one of the few guaranteed income sources that keeps pace with inflation. The extra potential income that comes from delayed filing can tens of thousands of dollars of additional income during your lifetime.
The idea of claiming early and investing the difference is popular. It can make sense of one has the discipline to invest the money, rather than spend it. In my experience, most people do the latter. I have retired friends who claimed early to do just that. They’re wealthy, living off their pensions (in some cases) and retirement assets. They viewed their Social Security as extra spending money.
To calculate whether it makes sense to claim early and invest we need to find the breakeven point where one has advantages over the other. I’ve run an analysis to offer an example.
Here are the assumptions:
- DOB: 02/10/1957 (age 62)
- FRA: Age 66 + 6 mos.
- PIA: $2,000
- Life Expectancy: Age 95
- Investment return: 6.00% (nominal)
- Inflation: 2.6%
Below is a chart showing the numbers:
You can see from the chart the breakeven point is age 84. Living beyond that means waiting to claim is better.
If the investment return is 4%, the breakeven point is age 81. A 6% return extends that to age 91.
There are a lot of variables to consider. Life expectancy, rate of return, and risk are the top three. If you are a disciplined saver and investor, claiming early and investing may make sense.
If you are a more conservative person who likes the sure thing, waiting to claim may be a better decision.
When claiming, people want to look for a simple answer. Like most things relating to financial planning, there is rarely a simple answer. I hope you can see from this discussion whey it’s so important to carefully analyze the claiming decision.
The second response is from Michael Dinich who writes at Your Money Geek:
I have worked in the financial services industry for the last 20 years where I assisted clients with their retirement planning. We would often discuss with clients, the best pensions options for their situation, the timing of electing social security benefits, and estate planning.
Currently, I hold a certificate with the NSSA (National Social Security Association) and have conducted workshops on social security benefits throughout the southern tier of New York and Northeast PA. In the last 20 years, I have attended numerous training sessions regarding social security benefits as part of my professional continuing education requirements.
I’m not trying to suggest I am the leading expert in social security benefits or dazzle you with my resume, but I have trained under the leading experts for numerous hours each year and have the t-shirt to show for it. Instead, I am sharing this to provide some background into my experience and the ultimate truth I have realized. The financial services industry and the financial media does not want you to take your social security benefits early.
Every course, book, lecture, seminar, etc., I have attended has always led the audience to one conclusion, you are supposed to wait until age 70 to take your benefits.
Now, since you are a reader of ESI Money and astute with your money, you can probably think of one, and more like a few dozen ways it may make sense to take benefits early.
I can relate.
I was a young advisor steeped in the libertarian counter culture of Gen X had the exact feelings you probably have upon hearing you must wait. What about if you take the money early and invest, or similarly what if you claim benefits early and delay withdrawing your own funds? “Surely, you can beat the growth of delaying benefits!!!”– I would protest, as my broker dealer’s compliance person starred at me sternly willing me to drop the issue.
The more analytical will point out that the math suggests you will receive more money from social security by waiting until your 70 years old and then living a long time. None of the social security maximization calculations ever consider the time value of money, the opportunity cost of investing the money or the cost of consuming your assets to facilitate delaying social security benefits.
Once we consider that decisions concerning social security do not happen in a vacuum, the situation becomes complex. This is exactly the type of case the financial services industry and media should be helping you navigate. However, the response is usually the same, wait until age seventy if you want the most money.
The reality is it’s not an issue of mathematics or economics; illustrations can be run to show almost any scenario in a favorable light. However, all we can do is forecast; we don’t know what your longevity will be, how the markets will perform, or what the rate of inflation will be. We don’t even know what future benefits will look like; how will benefits be taxed in the future, how will cost of living increases (if any) be calculated?
The truth is it is an issue of liability; the fear is if a journalist or advisor talks you into claiming early benefits and you lose all of your money in the markets then you will sue them. I wish there were more to it than that, but at the end of the day it boils down to liability.
If you delay taking your benefits until age 70, and then the government increases taxes, implements means testing, or you fail to live your actuarial life expectancy, you can’t blame the author of a book, blogger, or financial advisor. Well, hopefully, you can’t, because who could have possibly predicted any of that happening?
The industry’s stance regarding claiming benefits early is “caveat emptor” (buyer beware). If you want to take your benefits early, you won’t be doing it with the blessing of the industry, and you will be expected to bear the consequences of getting it wrong.
I have run thousands of fancy detailed reports showing clients the differences in claiming benefits early and delaying, and overwhelming clients have chosen to claim early. Many times, clients claim early despite overwhelming data that suggests they should wait. The two most cited reasons clients tell me they are choosing to take benefits early:
- They don’t believe they will live as long as the projections suggest.
- They don’t trust the Government won’t alter the programs to their detriment.
Most of the families I have met with cite non-economic reasoning for choosing when to elect to receive payments. As much as we like to be rational, most people make decisions for emotional reasons and then try to justify their decision math. There is nothing wrong with deciding for psychological reasons; you need to be prepared to be responsible for the result.
If taking your social security benefits early and investing the money make you happy, go ahead and claim your benefits early. However, if anyone asks, you didn’t hear it from me. 😉
I haven’t run the numbers for our family yet or thought deeply about all the issues as we’re a ways off from a decision and I have time.
But I have some preliminary thoughts to share with you.
Overall, I’m currently leaning towards taking SS early, but as you’ll see I’m going a bit back and forth. Here are my general thoughts on the issue to date:
1. I don’t really need the money.
When you take the financial issues out of when to claim SS, it makes things a lot simpler.
We have more than enough to live on throughout our lives, so SS is just a bonus for us. In fact, when I began blogging in 2005 I used to say things like, “I’m counting on zero from Social Security.” And that’s what I planned for.
That said, I do want to get a “good deal”. I paid in the maximum to the SSA for most of my working years and would like to be compensated for that.
But whatever I do, it’s not going to make a material difference in my finances.
2. I can invest the amount and earn more.
Since I don’t need the money, I can take whatever I get, invest it, and watch it grow.
Of course no one knows what the markets will do, but with even a fair assumption of return rates (as noted above), I would be able to push the breakeven well into my 80’s.
As for the “discipline” issue noted above, I think I’d have the discipline to invest (versus spend) it if that’s what I decide to do.
3. I’d rather be in charge of my money.
I’m not a big fan of the government managing my money, so I’d rather be in control of it sooner rather than later.
In addition, it’s clear that something will eventually need to be done about the liquidity of SS and this likely means reduced benefits and/or higher taxes on those of us with higher incomes in retirement.
This leads me to think getting as much as I can as soon as I can is a good idea.
4. There’s something to be said for having more money when you’re younger and able to enjoy it.
Even if I blow the money completely with an extra extravagant vacation each year, I’d rather do that when I’m 62 than when I’m 82.
Who knows what shape I’ll be in later in life — no one knows.
As one person said above, tomorrow is not promised.
5. I think the averages say it doesn’t matter when you take it — it all works out to be the same amount.
We heard this above, but let’s go back to Your Complete Guide to a Successful & Secure Retirement where they say:
It is actuarially true that if you live to average life expectancy, taking benefits at any age should provide roughly the same cumulative amount of benefits.
There. That takes the pressure off a bit, doesn’t it? 😉
6. I am the high earner, so I should be careful about taking SS early.
Especially since my wife eats so well she’ll probably live to 120!
And since only one of us needs to live a normal lifespan to make delaying worth it, this tilts the scale towards waiting.
7. I will need to investigate strategies for my wife and I working together to maximize our benefits.
It may be she can claim early (or at least at FRA) on either her benefit or spousal benefits while I wait.
As I noted above, we will need help figuring this out.
In the end, there are so many uncertainties (life expectancy, tax rates, income and RMDs, future benefits of SS, investment return rates, etc.) that it’s almost impossible to make the “best” decision. We each need to factor in our own circumstances and plans, make a decision, then hope the uncertainties don’t stack up against us to make our decision the worst possible outcome.
Then again, if you don’t need the money and consider even one penny of it a bonus, then the worst possible outcome is way better than you expected/need. 😉
Anyway, those are my thoughts on the issue. What’s your take?