Your ability to start taking Social Security starts when you turn 62 years old. The latest you can delay taking Social Security payments is when you turn 70. This leaves you with the question of eight years of when should you start your monthly payments. If you haven’t consulted with a Financial Planner and have questions about your situation, we urge you to please contact us here.
Firstly, it’s important that you understand how the system for payments works. If you begin taking payments before your full retirement age (which can currently fall anywhere between 66 and 67 dependent on the month you were born) then those payments will be permanently reduced. On the flipside if you wait until after your retirement age up to the age of 70 your payments will be permanently increased on a scale dependent upon when you start taking them. Your monthly benefit payment is increased by 8% guaranteed every year that you delay payments.
After learning this the most obvious thing to do to get the most out of the system might seem to delay taking payments for as long as possible, but this is not necessarily true. Like many financial decisions the right time for you to start claiming depends largely upon your unique financial situation. The most obvious answer to the question would come in the form of need. If you need the money then start claiming it as soon as that need arises. If, however, you have other forms of income (investments, rental properties, annuity income, pensions, etc.) that are providing the lifestyle you want for your retirement then you should consider delaying taking payments. So where is the breakeven point and how do we calculate it?
Your own life expectancy is an impossible thing to predict accurately, but having a vague idea in your mind can help you to decide when you want to begin your Social Security. Waiting until you’re 70 to start taking higher payments only works well for you if you are alive long enough to enjoy the extra money. The current state of your health, history of disease in your family, your parents age when they died are all good starting points to give you an idea of if you think waiting to start your Social Security will work well for you.
If you have a proven track record of being able to invest wisely enough that you can earn a higher rate of return than 8% annually, then taking your benefits early might work really well for you.
Consider this example, your social security income will increase by 8% each year you delay. If you are able to invest a retirement account and achieve a rate of return higher than 8%, you should consider taking your social security earlier as your retirement account will grow more quickly and be able to generate more income down the road.
Achieving a long term rate of return greater than 8%, however, is very challenging in our current market environment. Back in the 80’s when you could buy bonds that paid 10% interest, this might have been a safer bet, but in today’s market, you would have to be allocated completely to stocks which may require greater risk in your investments than you are comfortable taking on.
When you or your spouse die the other is entitled to keep receiving the Social Security payments that are the higher of the two. Therefore if you are the higher earner in the house and you wait until 70 to receive your payments that means both you and your spouse will be entitled to that money no matter what happens to you. You should consider if it makes financial sense for at least one of you to allow those payments to grow over those extra 3-4 years until you hit 70.
If you are unsure of when the ideal time to begin taking social security is for your situation, please contact us here, and one of our advisors will reach out to you. We would love to run a breakeven analysis for you to make sure you’re making the smart decision with your money.