Decoding the Best Time to Tap into Social Security
One of the most financially impactful decisions retirees face is when to commence Social Security benefits. Your age of claiming significantly influences the size of your monthly checks for the remainder of your life. Many financial planning experts advise delaying starting payments past full retirement age up until age 70, if you have average or longer-than-average longevity expectations. This allows you to permanently lock in a higher payment amount each month from Social Security. However, an alternative argument exists for claiming benefits at the earliest age of 62 and then investing the money you receive. If invested wisely, it could potentially earn higher returns than the increased monthly benefit you would receive from waiting several more years before initiating payments. This paper will comprehensively examine and analyze the pros and cons of these competing Social Security claiming strategies.
Claim Early and Invest
Claiming Social Security at the earliest eligibility age of 62 results in permanently reduced monthly payments compared to waiting until one's full retirement age, which ranges from 66 to 67 depending on your birth year. For each year earlier than your full retirement age that you claim benefits, your monthly check is reduced by approximately 6 to 7 percent annually. So claiming several years early can result in monthly payments that are 25 to 30 percent less than your full benefit amount. However, you have years of additional money that you can invest. Even with moderately conservative investments, this could yield substantial compounded gains over time. For example, if your full retirement age benefit would be $1,500 per month, but you claim 5 years early at age 62 and only receive $1,050 per month, you are giving up $450 per month. But over just 10 years, if you invested that $1,050 each month and earned a 4% annual return, you would end up with over $150,000 saved and invested. This might easily outpaces the additional $54,000 you would have received from Social Security by delaying until full retirement age.
Playing the Waiting Game: Benefits of Delaying
On the other hand, by waiting to claim Social Security, you lock in permanently higher monthly benefit payments. Each year past your full retirement age that you delay benefits, your monthly amount increases by about 8 percent annually. So waiting from age 67 up until the max age 70 provides a 24 percent boost to your full retirement age benefit amount. In our example above with a full retirement age benefit of $1,500, delaying to age 70 would mean $300 more per month on an ongoing basis. Over 20 years of retirement, that results in nearly $72,000 more received through Social Security compared to claiming at age 67. And if you have longevity in your 90s, the advantage of delaying is magnified even further.
Factors to Consider in Your Decision
So should you claim Social Security early while investing the money, or be patient and wait for substantially higher monthly payments? There is no cookie-cutter answer that fits all. The ideal approach depends greatly on your life expectancy, your portfolio's expected investment returns, interest rates, and numerous other personal financial factors. It requires carefully projecting total lifetime Social Security payments and total investment portfolio value under different claiming age scenarios. As part of your analysis, also consider taxes and the impact on spousal or survivor's benefits if married. Although it requires some complex analysis, with prudent planning you can make an informed optimal decision on when to pull the trigger on Social Security based on your situation.