Consider yourselves warned.
Financial planners advise most clients to defer taking social security payments until either their full retirement age, or even age 70, if they can afford to live comfortably without them.
The reasoning sounds simple. Under current law deferring payments might eventually get you substantially more per month. If you live a very long life you could collect more total dollars. Certified financial planners (CFPs) show charts like the one below to illustrate this point.
Boomers (born from 1943 – 1954) are told they will see an extra 7.3% monthly for each year they wait past their normal full retirement age. People born after 1959 would realize an even larger 7.4% increase for each year of deferred gratification.
At first glance that seems like a no-brainer. Who wouldn’t want to collect $4,469 per month versus $1,992? Waiting until age 70 to collect represents a $29,724 difference in annual income.
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When you realize what that means for you in the eight years between ages 62 and 70 you might not take the bait. Early retirees would receive $23,904 yearly- $191,232 in total (excluding any cost of living [COLA] adjustments) over the eight years before reaching age 70.
Divide $191,232 by the extra $29,724 you’d get annually by starting at age 70 and you'll realize it would take more than 6.4 years just to be even in dollars received with the individual who started taking benefits right away, at age 62. Adjust all that excess cash for present-value and the break-even point gets even longer.
The chart below illustrates the Social Security breakeven analysis for those beginning payments at age 62, 66 and 70, relative to each other.
If you will not exceed the earned income limit which triggers penalty taxes, people collecting immediately, when eligible, are guaranteed to do better than those who don’t, until they reach about age 75.
Baby Boomer retirees who collect, starting at 66, won’t have pocketed as much money as earlier retirees until age 77. Waiting until 70 to draw higher SS benefits sounds good but means you won’t get paid more actual dollars than less patient people until around age 79.
SocialSecurity.gov figures current 60-year old males can expect to live to about 83 and females to around 86. Based on those average life expectancies, collecting early means you’ll be ahead of the game for more years than you can expect to be behind.
Furthermore, consider the quality of life you can expect to have from 62 to those various break-even ages. Most people are relatively healthy and active earlier in that span, but not so much so as they approach 75 – 79 years of age and beyond. Getting the money earlier can likely buy a lot more happiness compared with the ability to pay for fancier assited-living or nursing home care late in life.
An impossible-to-predict wildcard scenario could tip the scales even further in favor of choosing to take SS payments as early as possible. The political ‘war on wealth’ is only intensifying at the same time budget deficits are exploding. It seems probable that means-testing of some kind will be imposed in the reasonable future.
Cutting benefits to current recipients is a political third-rail. Saying that people with more than a specified asset level can’t collect social security because ‘they don’t need it’ and ‘society can’t afford it’ is not beyond the realm of possibility, though.
That would be the ultimate insult to people who delayed taking benefits in order to maximize their future payouts. Despite paying into the system their whole lives they conceivably may end up having missed getting anything at all early, or later.
There is a huge industry devoted to maximizing social security payments by ‘working’ the system’s rules and regulations to advantage. In the end, simply taking the most you can qualify for, at the earliest possible date, might be the best strategy.
Consult with your personal financial advisor before making any decision on this very important issue but be aware that the advice may be biased.