There’s an old saying: “just because you can do something, doesn’t mean you should”. This is a helpful framework to think about Social Security. Since you’re reading this blog post, you might be approaching (and thinking about) retirement. If so – like millions of retirees before you – you have likely asked yourself, “when should I start Social Security?”
Before we dive into specifics, let’s highlight some basics about Social Security benefits:
- The government assigns everyone a “default” age at which they assume you will start collecting Social Security. This is your Full Retirement Age (FRA) and it ranges between 66-67 depending on the year you were born.
- You can always start collecting your retirement benefit before your FRA, but the earliest is 62.
- You can opt to delay receiving your benefit until you are 70.
- Your monthly benefit is based on your earnings history and when you decide to start. The earlier you start, the less you receive. The opposite is also true; the longer you wait, the more you receive (all other things being equal).
- Social Security payments do not automatically start, so whenever you are ready you have to apply for benefits.
Now that you know some general information, should you start collecting Social Security as soon as possible (age 62)? It’s not always black and white. Here are the most common reasons we hear, and some considerations for each scenario.
Reason #1: I want to receive Social Security benefits before they run out.
Consideration: Social Security is fully funded through at least 2037, and an incremental increase in the Social Security payroll tax could boost the system’s longevity.
There are no shortage of news articles about the uncertain future of the Social Security system. However, current projections show that Social Security is fully funded until at least 2037 if no changes are made. After 2037, it could still pay out approximately 75% of current benefits.
The Social Security Administration (SSA) further estimates that one option to restore balance is to raise the payroll tax by two percentage points (from 12.4% to 14.4%). Keep in mind that workers are responsible for only half of this tax (up to $140k in wages). Employers cover the other half. So, the decrease in most people’s paychecks would be hardly noticeable. This minor change could keep the system afloat for another 75 years – past the lifetime of most people alive today.
In other words: Congress has almost two decades to figure out what to do. That’s a pretty long runway, even for Washington. Please don’t allow politics to dictate your decision on when to elect Social Security benefits.
Reason #2: What if I die in my 60’s or early 70’s? Every year I wait, I’m leaving money on the table.
Consideration: You could live much longer than you predict, which also creates potential for leaving money on the table.
It is hard to argue with this one, because no one knows when they are going to die. However, unless your family has no history of longevity or you have underlying health conditions, it’s worth considering the opposite. What if you live into your 90’s or 100’s?
If you start collecting Social Security at 62, you will permanently reduce your benefit by as much as 30%. In other words, a full benefit of $2,500 at 67 would only equal $1,750 if you started at 62. $750 less per month over a 30-40 year retirement amounts to hundreds of thousands of dollars left on the table.
If you are married and the primary breadwinner, this can also impact benefits your spouse can receive after your death. Your Social Security benefits do not automatically go away when you die. Instead, your surviving spouse can continue receiving your benefit if it was the larger of the two (i.e., they would drop their own benefit and take yours instead until they die). By starting Social Security benefits at 62, you lock in how much your spouse can receive after your passing. It’s important to consider what income your surviving spouse might need if/when something happens to you.
Reason #3: I don’t really need the money now, but I think I can take the lower benefit, invest it, and get a better return than what Social Security will give me for waiting.
Consideration: Annual investment returns are unpredictable, while delaying your benefit increases the periodic payout.
It’s possible to get a better return by investing a lower Social Security benefit, but it’s not a sure thing. Typically, individuals can lose more in this situation and have more difficulty covering retirement expenses.
Per the chart above, you can see the significant decrease in benefits by starting at age 62 (compared to an FRA of 67).
However, another way to look at this information (see the chart below) is to show the increased benefit by waiting to start benefits later:
By delaying Social Security benefits by just one year, you will automatically receive a 7% larger benefit. Waiting two years increases your benefit by 14%.
While it’s possible to earn more than 7% from the stock market in one year, there are too many variables to guarantee this kind of return. In fact, a study by Dalbar Inc. found that even though the S&P 500 averaged a nearly 10% return over a 20-year period (1995-2015), the average individual investor only earned about half that, or 5% per year. Barring any major changes to the Social Security system, the payout amounts are set. For individuals approaching retirement, it’s often better to not take big risks that have potential to severely impact your financial future.
The Bottom Line
In the majority of cases, it is better to not elect Social Security benefits as soon as you are eligible (62). However, if you are in poor health, are single, or are not concerned with leaving benefits for your spouse, electing benefits at 62 might make sense for your situation. One of the most important things to keep in mind is that the SSA is not responsible for helping you make the best decision. They do not know your personal circumstances or the whole picture.
Social Security benefits often make up a significant part of most retirees’ financial plans, so it’s important to conduct a thorough analysis to identify the best option for your situation.
If you have any questions, please reach out to our team here at Taylor Hoffman!
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