Weighing the Social Security Benefit Decision

The best time to start collecting your Social Security retirement benefits is when it’s best for you. There is no single age that’s optimal for everybody. There are reasons why it makes sense to start early and others why it might be a good idea to delay.

At your first eligibility age of 62 (or later if you don’t have 40 credits of coverage at 62), your benefit is permanently reduced by up to 30 percent. The reduction is based on how far you are from your full retirement age. By delaying your benefit application past your full retirement age up to age 70, there are delayed retirement credits of 8 percent per year (or a little less if you were born before 1943).

Here are five questions to ask yourself before applying for Social Security retirement:

1. Are you still working at 62? Until you reach your full retirement age, there is a limit on how much you can earn each year before your benefit is reduced. For 2019, you can earn up to $17,640 before your benefit begins to be cut by $1 for every $2 you earn over the limit.
2. Will your spouse or minor or disabled children qualify for benefits from your record? The value of their benefits, added to your own, may help you decide if taking your benefit sooner is your best choice.
3. Is your spouse qualified for Social Security retirement on their own work record? If so, it might make sense for one of you to apply early and the other to maximize their benefit and a potential survivor benefit by delaying their application. Read Five Things Every Woman Should Know About Social Security to learn more about spousal, widows and divorced spouse benefits.
4. How long do you expect to live? Although Social Security provides a life expectancy calculator, it is hard to predict how long you might live with much accuracy. Remember, however, that it might be longer than you think. Your current health, lifestyle and family history could increase or decrease your life expectancy.
5. Do you need the money immediately? If not, you might want to delay your application for a permanent increase to your benefit—or you could apply for the benefit and invest the money for future use.

In last month’s true-false quiz, I suggested that those who are in good health and have a family history of longevity should consider delaying their Social Security benefit to age 70. One reader commented that not everyone would agree with this strategy. He suggested that if you don’t need the money at 62, you can still apply and have the benefit deposited directly into an investment account. He provided the following example based on his situation:

• Benefit payable at age 62 is $23,508 per year.
• If you invested the money and achieved a steady rate of return of 7 percent, you would have $281,579 at 70.
• Although the amount payable from Social Security at 70 would be $42,816 a year if your application is delayed, It would take until age 85 to receive as much of the larger payments as you would have been received if you started taking the benefit at 62 at the lower amount.
• If you never need that money to live on, then at 90 in the same scenario you would have $2,053,342. If, on the other hand, you saved all the age 70 amount of $42,816 per year at 7 percent until you were 90, you would only have saved $1,920,947—a difference of more than $132,000.

Still, there are reasons why it might make sense to wait until age 70 if you’re in good health at 62, can afford to delay Social Security retirement and have a reasonable expectation to live a normal life expectancy or beyond:

• There’s no guarantee you’ll get a 7 percent return on your investments. A higher rate of return could require a higher level of diversification between cash, stocks, and bonds. If you invested $1,000 in equal amounts between the G, F, C, S and I funds for the past 10 years, your average return would be 7.37 percent. But in the past five years, the average was 4.36 percent.
• Assuming you begin to withdraw 5 percent from your investments starting at age 70, the withdrawal from a $281,579 investment would only amount to $14,078 per year. If you waited until 70 to claim the benefit, the amount would be $19,308 a year.
• Between age 62 and 70, a lot of people will be able to work at least part-time. On the other hand, if you need extra money at age 90, it is less likely you would be able to produce earned income.
• Life expectancy is increasing all the time, and you could end up living a lot longer than you thought.
• Although by age 85 you would have received about the same total amount of benefit between 62 and 85 as between 70 and 85, the monthly amount of your benefit would be significantly higher if you waited until 70 to begin payments.
• Your larger benefit payable at 70 will receive annual cost of living adjustments on the larger amount.
• If you claim your benefit at 62 and you have other income, you will pay taxes on some of your benefit. That means you won't have the full amount to invest.
• To compensate for delaying your Social Security application, you may have the option of withdrawing larger payments from your retirement savings between 62 and 70. The added benefit to this strategy will be that the required minimum distribution payments from your retirement accounts will be less as a result of having a smaller balance.

According to Social Security research, reliance on Social Security income increases with age, suggesting that as people get older they may have depleted other income sources. In 2014, 33 percent of people age 80 and older received 90 percent of their income from Social Security. Only 18 percent of 65-69 year olds were in that same situation.

Certified financial planner and Social Security expert Mary Beth Franklin advises that for single people, it probably makes sense to wait until full retirement age to collect Social Security, particularly if they are still working. According to Franklin, although benefits would be larger if you waited to collect them, the real value of delaying until 70 is to leave a bigger benefit for a surviving spouse.

For married couples, it will still make sense for the spouse with the higher Social Security benefit to delay up until age 70 in order to collect the largest retirement benefit while both spouses are alive and to create the largest possible survivor benefit for the spouse who is left behind after one dies. Couples where one spouse has no Social Security benefits of his or her own are in a bind. The working spouse must actually collect Social Security benefits to trigger benefits for the non-working spouse. They should look closely at their relative ages to decide when to begin claiming benefits.

As you can see, this isn’t a one-size-fits-all decision. It’s one of those situations where it might make sense to make a list comparing the benefits of claiming early vs. delaying your application. Consider your family health history, your other savings and sources of income, your risk tolerance for investing, your ability and willingness to keep working, and other family members who rely on you for financial support. Remember that what works for someone else may not match your situation.