When you are walking through the supermarket, you’re likely to see an array of financial magazines recommending that you wait until 70 to collect Social Security. You may infer from the articles that your full benefit grows by 8% annually until you reach age 70. In other words, the longer you wait to file, the more money you’ll get.
Is this fact or fiction?
First of all, there’s no single Social Security strategy that’s appropriate for everyone. Your personal health and financial circumstances will dictate the best time to apply for benefits. Second, you won’t necessarily get more money by waiting. You will receive a bigger monthly check, but there’s no guarantee that the cumulative benefit will be greater. For example, dying shortly after filing offsets the advantage of higher monthly benefits. Checks stop immediately upon death, and the government keeps the rest. The Social Security Administration doesn’t make payments to beneficiaries. Only a surviving spouse can claim your benefit and take yours in exchange for their own.
Waiting also comes with opportunity costs. You forfeit returns from investing the money and risk a reduction in purchasing power. If you’re eligible for Social Security at age 62 but wait 8 years to file, you’re postponing the receipt of 96 monthly checks. In this case, you won’t break even until somewhere between the ages of 79 and 83. In other words, if you don’t live to a ripe old age, you’ve taken a gamble and lost.
When clients in their 60s need more monthly income to make ends meet, they may have a choice about where to turn first – Social Security or their personal investment accounts. To answer this question, I suggest clients think about the level of control they exert over different sources of income. They have a great deal of control over their personal savings and investments—the flexibility to stop and start withdrawals, change the withdrawal amount, and decide how much, if any, to give to charity or pass on to the next generation. On the flip side, they have little to no control over Social Security. Recipients can’t dictate how the account is invested. Once they start collecting benefits, they can’t turn them off. And they can’t raise or lower the monthly amount as their needs change. When clients factor in the issue of control, they typically decide to take their Social Security benefit first and decide how they want to use their individual investments as time goes on.
The key to this approach is viewing Social Security as just another retirement account, on par with a brokerage account or a 401(k) account. In my opinion, Social Security shouldn’t be siloed. It just limits flexibility.
The issue of control is central to the decisions of both couples and singles; however, if spouses or domestic partners have a disparity in income, the issue of survivor benefits comes into play. In these situations, it may be best for the higher earning spouse to delay receipt of Social Security as long as possible. This is particularly true if the higher earning spouse is older and more likely to die first. Surviving spouses can choose to receive their own monthly benefit or their spouse’s benefit, which can be significantly higher.
One of the most common myths about Social Security income is that it’s not subject to federal income taxes. On the contrary, you’ll pay taxes on benefits if your total income exceeds a certain threshold. That threshold is rather low, which means 50% or 85% of your benefit could be taxable if you take withdrawals from qualified retirement plans or earn income from work. If you don’t exceed the income threshold as a young retiree, that may change when you reach age 72 and start taking required minimum distributions.
The rules governing Social Security are complicated and making the right decisions is challenging. Before you act, consider consulting a financial advisor to get a customized strategy to maximize your retirement benefits.