Updated: When to take Social Security
Should I take Social Security early, or on time, or late?
It depends. Below are two reasons why I generally recommend to take it as early as possible. I also provide 3 exceptions to my general recommendation.
Reason #1 – Social Security is scheduled to cut benefits in the year 2034: They are not hiding this. Read it here. They anticipate a 24% cut in benefits then. How people whistle past this point is stunning. What will need to happen for us to take this seriously? Will we just have to wait until the year 2034 to see if it’s true? Should we take any measures now?
Reason #2 – The Cost of Delaying: Delaying is not free. You have to give away the money you could have been collecting.
The earliest you can start collecting Social Security benefits is age 62.
If you don’t collect at 62 you are giving away the money you could’ve collected.
Let’s translate what that adds up to:
Suppose your Full Retirement Age (FRA = the age you could collect full Social Security benefits) is 66, and your FRA benefit is $2,800 a month. You could wait until FRA, or you can start drawing your SS benefit at age 62 with a 25% reduction.
Breathe – I know a 25% permanent reduction sound scary, but it’s not necessarily bad! Yes, it’s less money, but it’s less money for more time.
A 25% reduction off $2,800 would equal $2,100.
If you were to receive $2,100 monthly benefit at age 62, you would receive $100,800 by the year you turn 66 (FRA) ($2100 x 12 months x 4 years = $100,800).
By delaying, you are giving away that $100,800. Even if you didn’t grow the $100,800, you’re still $100,800 ahead of the guy who waited until age 66 to take his full SS benefit of $2,800.
How long will it take the one who delays to age 66 to catch up to the one who claimed at 62?
Doing the math: By delaying, your Social security benefit will increase by $700 a month. ($2,800 full benefit – $2,100 reduced benefit = $700) At the pace of $700 per month, it would take you 12 years to catch up to where you could have been had you taken the $100,800 before age 66 ($700 x 12 months x 12 years = $100,800).
So, that means, there was literally no financial gain for the first 12 years after your delay (from age 66 to age 78). It’s only after 12 years that you start to see the benefit of delaying.
Is waiting 12 years “BAD?”
Waiting 12 years just to recoup your money doesn’t sound so amazing. But you’re doing it in the hopes of a future benefit. Does the increased monthly benefit make up for it?
Whenever you give away money now for a future financial benefit, that’s called investing. How does an investment in Social Security perform?
Let’s quantify it in terms of rate of return.
If you decide NOT to take SS early at 62, but instead wait until 66, you essentially are choosing to invest $100,800 into Social Security!
As we saw, it will take you 12 years to recoup your investment. In fact, every 12 years you will get back another $100,800. That means it’ll take you 24 years to double your investment or 36 years to triple your investment. An investment that doubles in 24 years has a 3% compounding rate of return. An investment that triples in 36 years has a 3.2% compounding rate of return.
So, delaying to age 66 means investing $100,800 with Social Security and expecting to yield a 3% – 3.2% return on your investment.
That’s a relatively conservative rate of return. Better than some, not as good as others. Had you taken the SS early at 62, invested that $100,800 and yielded a return greater than 3% – 3.2%, you would have been better off taking it early than waiting until FRA.
Whose money would you rather spend?
Even if you spent the $100,800 and didn’t invest it – and most people will spend it – still, by spending Social Security’s money whose money didn’t you spend? Your own money! Your own money can remain invested. Just make sure it’s invested in a way that is expected to yield greater than 3% or 3.2%.
Another point to consider:
Should you choose to wait until 66, you will only truly yield a 3% – 3.2% compounding return if you live 24 – 36 years respectively! By that point you’ll be age 90 or 102. If you die before then, you didn’t truly reap the 3% – 3.2% yield. If you don’t anticipate living into your 90s then you certainly will have been better off taking the money early at 62. This way, even if you die at 66, your family will inherit $100,800!
Those who delay are setting themselves up for a double-whammy:
- Whammy #1 – They likely drew down their own investments while delaying Social Security.
- Whammy #2 – If they don’t live long enough, they wouldn’t even have recouped the money they gave to Social Security.
Reason #3 – Did you really need another annuity?
Following on the above logic – delaying Social Security entails giving away money for a future income stream. You are giving away your $100,800 to get an income stream of $700 a month. This is literally buying an annuity.
Did you need another annuity? If you didn’t need the annuity, would you just buy it anyhow? It’s remarkable how many people are receptive to purchasing this Social Security annuity without even investigating whether they even need this annuity.
The above arguments, coupled with hundreds of financial plans I’ve done for clients, are the basis for my general rule to collect Social Security as early as possible.
However, I have 3 exceptions:
Exception #1 – If you are able to collect a Widow/Widower benefit:
If your spouse has passed away, you may be able to collect a Widow/Widower benefit while delaying your own.
In my example above, if you delay you are receiving nothing from the age of 62 to 66. So, you are literally giving away the $108k (using my example above).
However, if you are able to collect a widow/widower benefit while delaying then you are not giving away the $108k and all my math changes. You will then need to redo the analysis and calculate the break even point to see if it’s worthwhile to delay. If you need help with this, let me know.
Exception #2 – If you will be relying “dangerously” on your portfolio:
Most retirees will be drawing an income from their portfolios. However, not all income-draws are healthy. You may have heard of the 4% safe withdrawal rule – a withdrawal rate of 4% or less will statistically allow you to draw-income from your portfolio for over 30 years. A withdrawal rate above 4%, however, has statistically shown itself to be dangerous for those who want income for a 30-year period.
For my clients that rely on their portfolios to the extent that they require a dangerous withdrawal rate above 4%, I begrudgingly tell them to increase their fixed Social Security income to Full Retirement Age. (I say “begrudgingly” because I feel safer telling them not to retire, than telling them to retire and delay social security.)
If you’re not sure what your withdrawal rate is, or if you’re not sure what a withdrawal rate is, let me know.
(Major) Exception #3 – The Earnings Test:
All my arguments above to take Social Security at 62 go silent if you earn too much money.
If you receive SS benefits before your FRA, you will have an income test to see if you’re making too much money. (Social Security determines what’s “too much,” not you. See HERE). If you are making too much money, then your SS benefit will be withheld.
The details of the earnings test is not for this article. I have a 1-hour webinar on the topic, including strategies to avoid the earnings test, posted in my archives for members. To access my archives, explore my membership details here.
If your benefit will be reduced due to the earnings test, then you can ignore the above arguments.
But, if you are not affected by the earnings test, then you have my blessing to collect early.
Furthermore, once you reach FRA, there’s no more earnings test. So, someone who reaches FRA, too, has my blessing to collect at FRA.
But wait! Doesn’t each year of delay beyond FRA give you an 8% benefit increase?
Once you’ve delayed all the way to FRA, isn’t it worth it to just wait until age 70?
Nope. The same arguments and math apply to delaying to age 70. Let’s illustrate:
Suppose your FRA is 66, and your FRA benefit is $2,800 a month. You could claim at FRA, or you can delay your SS benefit to, say, age 70 when the benefit would have increased to $3,696 a month.
Taking the benefit at FRA would be a “permanent reduction” compared to the age 70 benefit but, again, that’s not necessarily bad! Yes, it’s less money, but it’s less money for more time.
If you were to receive $2,800 monthly benefit at age 68, you would receive $134,400 by the year you turn 70 ($2800 x 12 months x 4 years = $134,400).
By delaying, you are giving away that $134,400. Even if you didn’t grow the $134,400, you’re still $134,400 ahead of the guy who waited until age 70 to take his full SS benefit of $3,696.
How long will it take the one who delays to age 70 to catch up to the one who claimed at 66?
Doing the math: By delaying, your Social security benefit will increase by $896 a month. ($3,696 increased benefit – $2,800 reduced benefit = $896) At the pace of $896 per month, it would take you 12.5 years to catch up to where you could have been had you taken the $134,400 before age 70 ($896 x 12 months x 12 years = $134,400).
So, that means, there was literally no financial gain for the first 12.5 years after your delay (from age 70 to age 82.5). It’s only after 12.5 years that you start to see the benefit of delaying.
Let’s quantify it in terms of rate of return.
If you decide NOT to take SS early at 66, but instead wait until 70, you essentially are choosing to invest $134,400 into Social Security!
As we saw, it will take you 12.5 years to recoup your investment. In fact, every 12.5 years you will get back another $134,400. That means it’ll take you 24 years to double your investment or 36 years to triple your investment.
An investment that doubles in 25 years has a 2.88% rate of return. An investment that triples in 37.5 years has a 3.06% rate of return.
So, delaying to age 70 means investing $134,400 with Social Security and expecting to yield a 2.88% – 3.06% return on your investment.
So, the math is actually less attractive to delay from 66 to 70 than it was to delay from 62 to 66!
It’s all in the marketing:
Of course, Social Security wants you delay. They tell you delaying will increase your benefit by 8% and there are even well-cited studies describing the delay until age 70 as the “optimal” strategy.
You just need to consider my above arguments to diffuse their marketing efforts. In addition, you have to ask yourself the following:
- Is it truly an 8% increase in benefit when, for the first 12.5 years you do not receive any additional benefit but are merely recouping the money you gave them? It’s all in the marketing.
- Is it truly a “penalty” or “permanent reduction” to take it at age 62? Or is it just less of a benefit compared to FRA?
I say this because the FRA benefit is also less of a benefit compared to age 70. Why don’t they call your FRA benefit a “permanently reduced” benefit compared to what you could’ve gotten at age 70? The terminology they use influences people’s attitudes. “Permanent reduction” sounds scary and bad. Exactly, it’s all in the marketing.
- What makes age 70 the “optimal” strategy? Is it because age 70 is when we no longer receive the 8% increase? Would the optimal strategy change to age 71 if Social Security would extend it’s 8% increase to age 71? What about if they’d give you an increase until age 90, would delaying until age 90 be the optimal strategy? Are our “optimal” strategies based on math or based on the age guidelines we’ve been provided by Social Security? In other words, is it all in the marketing?
I’m happy to discuss this with you and help you craft your retirement income strategy. To request a meeting, complete the form below.
All the Best!