By David Munn, CFP
Social Security retirement benefits are a vital part of retirement planning for most Americans. Deciding when to claim these benefits can have significant financial implications, not just for the individual retiree but also for their spouse, particularly in terms of survivor benefits. There is no one-size-fits-all answer to the question of when to claim Social Security, as it depends on personal circumstances such as health, financial needs, and longevity expectations. However, understanding the tradeoffs between taking benefits early, at full retirement age (FRA), or delaying them until age 70 can help individuals and couples make more informed decisions.
Understanding the Basics of Social Security Retirement Benefits
Before diving into the tradeoffs, it’s important to understand the basic framework of Social Security benefits:
1. Full Retirement Age (FRA): The age at which you qualify to receive 100% of your Social Security retirement benefit. For people born between 1943 and 1954, the FRA is 66. For those born after that, it gradually increases, reaching 67 for those born in 1960 or later.
2. Early Retirement: You can start receiving Social Security benefits as early as age 62. However, claiming before your FRA results in a permanent reduction in benefits. For instance, if your FRA is 66 and you claim benefits at 62, you will receive 25-30% less per month than you would if you waited until full retirement age.
3. Delayed Retirement: If you wait beyond your FRA to claim benefits, your monthly benefit increases by approximately 8% per year, up until age 70. This is known as the delayed retirement credit. Claiming at age 70 could result in a benefit that is 24-32% higher than the benefit you'd receive at FRA.
Tradeoffs of Claiming Social Security Early
Claiming Social Security before your full retirement age (FRA) has some distinct advantages, but it also comes with significant drawbacks. Here are the main tradeoffs to consider:
Pros of Claiming Early
1. Immediate Income: One of the most obvious benefits of claiming Social Security at age 62 is that you start receiving money immediately. For retirees who need the income to cover living expenses or healthcare costs, waiting may not be an option.
2. Shorter Break-even Period: If you have a shorter life expectancy due to health concerns or family history, claiming benefits early may result in collecting more over your lifetime. The break-even point, where the cumulative benefits of waiting outweigh the benefits of starting early, typically occurs around age 80. If you expect not to live that long, starting early may be beneficial.
3. Flexibility for Personal Circumstances: Some retirees may wish to claim early and invest the benefits or use them for other financial purposes. Additionally, claiming early can allow greater financial freedom, especially if you're planning to reduce work hours or retire altogether before FRA.
Cons of Claiming Early
1. Permanent Reduction in Benefits: Claiming at 62 means permanently reduced benefits, potentially 25-30% less than what you’d receive at FRA. This reduction will affect your monthly income for the rest of your life, which may significantly impact your standard of living in later years, particularly as healthcare and living expenses rise. If you live a long life, this reduction could cost you hundreds of thousands of dollars.
2. Temporary Reduction of Benefits if Still Working: Social Security places limits on how much you can earn from working if you begin benefits before your FRA. This is called the earnings test, and it applies until you reach your FRA. If your earnings exceed the limit for the calendar year, your benefits will be temporarily reduced.
Tradeoffs of Waiting Until Age 70 to Claim Social Security
Delaying Social Security benefits until age 70 can lead to larger monthly payments, but it also comes with its own set of tradeoffs. Let’s explore the pros and cons of delaying benefits:
Pros of Waiting Until Age 70
1. Maximizing Monthly Benefits: By waiting until age 70, you can increase your monthly benefit by up to 32% over what you would receive at FRA. This increase provides more financial security, particularly in the later stages of retirement when you might face higher healthcare costs or inflation. The higher monthly payments can make a significant difference if you live into your 80s or 90s and can act as a hedge against the financial risk of a long life, especially if you have concerns about outliving your savings or other retirement income sources.
2. Higher Survivor Benefits for a Spouse: One of the most significant advantages of delaying Social Security is that it increases the survivor benefits your spouse will receive after you pass away. If you wait until 70 to claim, your spouse’s survivor benefit will be based on the higher benefit amount. This could provide them with a much more comfortable income in their later years, especially if they outlive you by many years. This can be particularly important in situations where one spouse earned significantly more than the other.
Cons of Waiting Until Age 70
1. Delayed Gratification: The most obvious downside of waiting is that you have to delay receiving benefits for several years. If you need the income before age 70, waiting might not be feasible.
2. Longevity Uncertainty: If you pass away earlier than expected, you could end up receiving fewer total benefits over your lifetime. While delaying results in a higher monthly benefit, you may not live long enough to fully benefit from the increase. Individuals with poor health or shorter life expectancy may be better off claiming benefits earlier.
Conclusion
Deciding when to claim Social Security benefits involves weighing the immediate need for income against the long-term financial implications for both you and your spouse. While claiming early provides immediate access to funds, it results in a permanent reduction in benefits that can impact your standard of living and reduce survivor benefits for your spouse. Waiting until age 70, on the other hand, maximizes your benefit and enhances survivor benefits but requires delaying income, which may not be feasible for everyone. Ultimately, the best choice depends on individual circumstances such as health, financial needs, and life expectancy.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. This material is not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training. 1323GRJ