When should you start collecting your hard-earned Social Security? Conventional wisdom says the longer you delay, the better off you are. Yet maximizing your payment through waiting is just one way to get the most out of this key retirement income source.
In essence, the government pays you to wait for Social Security, and docks you for taking benefits early. You’re allowed to begin collecting at age 62, but your monthly payment will be lower than your “full benefit,” and it will stay that way (see “The Cost Of Starting Early”). To get more, you must wait until you reach the Social Security Administration’s “full retirement age,” which used to be 65—and still is, if you were born in 1937 or earlier—but is now inching upward, depending on your birth year. If you delay taking benefits beyond your specified retirement age, your payment will increase an extra 8% for each year you postpone benefits until age 70.
If you opt to start Social Security payments at 62, you’ll lose up to 30% of the benefit you’d get by waiting until retirement age. Still, delaying payments may not always be possible or even desirable. You could need the money—if, say, you’ve been downsized at work, or your health has forced you to retire early. In such cases, starting Social Security at age 62 may be better than draining your savings while you wait several years.
If you have plenty of other income, starting benefits early could pay off if you invest the money. But there’s no guarantee you’d come out ahead with this strategy. Your success depends not only on your return, but also on how long you live. Receiving several extra years of payments undeniably puts money in your pocket, and if you start benefits at age 70 rather than at 62, for example, you’ll need to live a number of years before the higher monthly payments make up for the cash you gave up by waiting. On the other hand, investing your early benefits in anything but the most conservative assets could put some of your otherwise guaranteed retirement income at risk.
The lower your portfolio’s returns, the better off you may be spending down your savings while you wait for benefits to kick in at age 70, suggests John Marotta of MoneyNews.com. If your savings only keep pace with inflation—and if you live past the age of 83.4—waiting for the age 70 payout will be a better deal. But if you earn 2.5% a year above inflation, the “break-even” age is 87.25 years, according to Marotta.
These days, of course, achieving those milestones isn’t unusual. According to the American Society of Actuaries, a 65-year-old male now has a 50% chance of surviving until age 85, while the average 65-year-old woman has 50-50 odds of being alive at 88. For a couple in which both spouses are 65, there’s a 50% chance one will make it to age 92.
Ultimately, your decision about when to begin Social Security benefits may hinge on how that income affects your financial plan. If you’re nearing 62 and would like to discuss your options, please give us a call.
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