Uncle Sam is spending trillions of dollars on economic stimulus and relief measures. The deficit will grow. Your 401(k) or IRA portfolio has recovered somewhat. But your ExxonMobil or Chevron stock is still at multi-year lows. You don’t know whether you need to consider going back to work. Or, if you are still working, you don’t know how much job security you have.
In the midst of this, you wonder: “Should I start Social Security earlier than I planned?”
The level of uncertainty in the world today gives rise to fear and apprehension. That can lead to rumors and decisions based more on emotions than on objective facts. Let’s take an objective look at the advantages and disadvantages of taking Social Security retirement benefits early.
A Review of the Basics
Social Security retirement benefits are based on your highest 35 years of covered earnings. You can begin yours as early as age 62.
If you take your benefit before your Full Retirement Age (ranging from age 66 to age 67, depending on the year of your birth), you'll reduce your benefit. For example, someone born in 1958 (reaching age 62 this year), who takes her benefit this year will get about 71% of what she would receive if she waited until her Full Retirement Age (age 66 and 8 months for those born in 1958).
If you take your benefit before Full Retirement Age, your benefit will be reduced.
And for every year you wait to start benefits after Full Retirement Age (FRA), your benefit will increase by 7% to 8% per year up until age 70.
Note as well that survivor benefits for a married couple are based on the higher benefit. If your benefit will be higher than your spouse's retirement benefit, consider how increasing your benefit by delaying it will enhance benefits when there's only one to receive.
Reasons to Take It Early
- You need the cash. If you don’t have savings or other income, you may need to take Social Security. You won't be alone. As the chart below shows, more than half of retired couples depend on Social Security for at least half of their income. Nearly a quarter depend on Social Security for 90% or more of their household income.1 And if you are the lower-earning spouse, claiming your own retirement benefit early won't jeopardize the eventual benefit of your higher-earning partner.
- Your spouse wants to begin "spousal benefits." A spouse who has little or no Social Security retirement benefits based on their own work record can only receive spousal benefits once the worker on whose record the benefits will be based begins to receive his or her retirement benefit. For example, Mary worked her entire career and Bob stayed home to raise the kids. Bob will only be able to draw benefits based on Mary's work history once Mary begins her benefit. It may be to the couple's benefit for Mary to begin her benefit early to enable Bob to draw his spousal benefit.
- You have poor health. If you are in poor or declining health and don't expect to enjoy a lengthy retirement, taking the cash early may be the right thing to do. That's especially true if you are the lower wage earner in the family. Survivor benefits are generally the higher of one's own benefit or your spouse's benefit. If you're the lower wage earner, taking your benefit early won't impact your spouse's survivor benefit upon your passing.
- You want to "hedge your bets." You're willing to give up additional benefits longer-term in return for the certainty of receiving cash benefits now. You may not be confident you'll live past 82 or 83. Maybe you think you won't need the extra benefits available by deferring. Psychologically, it may feel better to have the extra money now, rather than in a few years. This may not be the right answer financially, but may give you peace of mind emotionally.
- You need a short-term cash infusion. If you start Social Security benefits, you have twelve months to withdraw your application. You can repay the money you received and not have any negative impact on your future benefits. This an interest-free loan from Uncle Sam. But you need to pay the money back and do it within twelve months of beginning benefits.
- You believe in conspiracy theories. You look at the bulging national debt. You're aware that there's a Social Security trust fund holding close to $3 trillion. You (and others) conclude that Congress will seize the trust funds. Or they will reduce Social Security benefits. Your only alternative to seeing your benefits disappear is to sign up as soon as you can. (I wish this were entirely tongue-in-cheek. There are folks who believe Congress will actually take benefits away from a segment of the population that votes in higher proportions than most others—seniors.)
Reasons to Delay Taking Social Security Early
- Simple: Maximize your lifelong benefits. It's the money. If you defer taking your benefit until age 70 and you live beyond age 82 or 83, your lifetime benefits are likely more than if you started your benefit at FRA or earlier. And if you are the higher wage earner in your marriage, the survivor benefits you leave behind should you predecease your spouse will also reflect that higher amount.
A Strategy to Help Delay Taking Social Security Early
- Use your IRA to make up for what Social Security might otherwise provide until age 70. This allows your lifetime benefit to grow while possibly paying low taxes on IRA distributions. It's a strategy that may not only increase your Social Security benefits, but may also reduce your taxes once you have to begin taking distributions from your IRA.
It's complicated, deciding when to begin Social Security. There are lots of factors involved, and strategies to consider. Wealth advisors can model alternatives, look at the overall picture, and help you decide the right outcome for you.
If you'd like to discuss whether taking Social Security early is for you, give us a call, send us an email or schedule a video conference. We're here to help.
Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.