It’s finally here, that big retirement age that you’ve been working toward. Is now the right time to collect Social Security?
Not necessarily. There are some benefits to holding out on collecting Social Security a bit longer. Here are three reasons to consider collecting down the road:
Delay Taking Social Security for an Increase in Benefits Pay
Social Security benefits are available to Americans who have worked for at least a decade and paid their taxes at that time. In a nutshell – you get credits for paying Social Security taxes (about 4 credits annually,) and once you hit 40 credits and the full retirement age, you can collect Social Security.
The “full retirement age” is about 66 right now, depending on when you were born. You can use a calculator here to determine what your full retirement age will be.
Social Security benefits were paying out an average of $1,413.37 per month as of June 2018. But you can receive a maximum of $2,788 depending on how much money you earned throughout your career.
You’re allowed to start taking Social Security at age 62, but you’ll get a reduced amount until you hit full retirement age. In fact, you’ll take a 25% benefit reduction should you take it early.
You can collect Social Security as late as age 70, and you might want to consider holding out until then. You’ll get an 8% increase each year from your full retirement age until age 70, which is a very good gain relative to market performance.
The Social Security Break-Even
When you’re thinking about whether you should delay taking Social Security benefits, consider the break-even point. That is the point where you what you get from claiming later is equal to what you’d received if you started earlier.
For most people, that point is between their late 70s and early 80s.
If you plan to take out social security at age 62, then your total accumulated benefit could be less in your late 70s than if you had waited until 66 to take your benefit.
Odds are if you make it to 65 then you have a greater chance of making it to 83.
In my experience, if you plan to delay it even further to age 70, the breakeven point is around age 84/85.
Assumptions You Can Use In-Plan
Here is one example to illustrate the breakeven point.
Let’s say Steve is approaching retirement age and isn’t sure when to take his benefits. If he takes his benefits starting at the below ages, then his monthly benefit would be approximately:
- 62 – monthly benefit – $2,100
- 66 – monthly benefit – $2,900
- 70 – monthly benefit – $3,700
- Inflation Rate – 2%
If Steve takes his benefits at age 62 vs. age 66, then those numbers would look more like these:
- Accumulated benefit at age 79 if he takes the benefit at age 66: $544,105
- Accumulated benefit at age 79 if he takes the benefit at age 62: $540,36
- By age 90 Steve would have accumulated around $123,000 more in benefit by waiting to take a full retirement age. ($66k more at age 85)
If Steve were to take his benefits at age 70 vs. age 66:
- Accumulated benefit at age 85 if he takes the benefit at 70: $840,333
- Accumulated benefit at age 85 if he takes the benefit at 66: $833,660
- By age 90 Steve would have accumulated approximately $60,000 more in benefit by waiting to take a full retirement age.
- Note: This example makes the most sense when Steve earns a much higher income than his wife. That’s because the spouse who earns less money can file for their spouse’s benefit if he or she should pass away.
Knowing your break-even point is helpful in situations like considering your life expectancy. If you live to full retirement age, you’re likely to live to age 83 or beyond. That means you are probably going to live longer than your break-even point.
That’s why it pays to delay Social Security benefits a bit longer; even waiting one year longer for the 8% increase means you’ll have more to live off of in retirement.
If you’re married, it becomes even more important to wait at least until full retirement age to claim Social Security. Maybe you don’t expect to live to your breakeven point, but your spouse may very well live beyond it. This could act as sort of an insurance policy for your spouse, and that’s because if you pass away in your 70s, your spouse will have a higher benefit than if you took it at your full retirement age.
Also know that your spouse can apply for benefits if the higher-income earning spouse passes away first. Most households have one higher earner, so this is an important benefit to be aware of. It acts like an insurance policy in case the higher earner dies before their spouse.
Should You Delay Social Security?
Delaying Social Security benefits depends on you and your situation as you near retirement. But if you have the means to wait until age 70 to start claiming your money, you will see an impressive return on your investment that makes it well worth the wait.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.