Question:
Should I take Social Security early, or on time, or late?
Answer:
Possibly the most popular Social Security question I receive from clients is whether they should take their Social Security (SS) benefit as early as possible – age 62 – or should they wait until their Full Retirement Age (FRA) to start receiving SS. The typical argument in favor of early receipt is that you can receive income for 4 years or more which can be invested or spent however you please. The argument against is that early receipt of SS will cause a permanent reduction in your SS benefit. This is a great question and here are the things to consider:
Taking Social Security early (before “Full Retirement Age” (FRA))
There are 2 things you’ll need to look out for when taking Social Security before FRA:
- Earnings Test
- Permanent reduction for early receipt of Social security
Earnings Test:
If you receive SS benefits before your FRA, you will have an income test to see if you’re making too much money. If you are making too much money, then your SS benefit will be withheld.
How much money is too much money? I’m sorry to say that Social Security defines “too much,” not you. Every year they set a limit of how much you are allowed to earn (see HERE). Any earned income beyond that amount will cause a reduction of your SS benefit at a rate of 2 to 1. This means, for every $2 in excess of that amount your SS benefit will drop by $1. For people who are still working, this will most likely wipe out their SS benefit.
The earnings test becomes more lenient in “the year you turn FRA.” For example, if you turn FRA in August of 2019, then from January 2019 – August 2019 is “the year you turn FRA.” In that year, for every $3 in excess of the allowable limit your SS benefit will drop by $1. Once again, if you’re at work, it is possible that your entire SS benefit will be wiped out.
(It’s worth noting that only EARNED income reduces your SS benefit. This does not include pension income or income from your investments or retirement accounts. Also, any SS benefit withheld due to the earnings test will be returned at FRA.)
Permanent reduction for early receipt of social security:
In addition to the earnings test, early receipt of receive Social Security (ie. before FRA) will cause a permanent reduction in your Social security benefit.
How much is the reduction? It varies, depending upon what your FRA is and how many years before FRA you choose to receive your SS benefit. The maximum reduction is 30%, although many of my current Social Security-aged readers are confronting a 25% reduction.
Is a reduction “BAD?”
As scary as reduction sounds, it’s not necessarily a BAD thing! Here’s one way of looking at it which actually puts an attractive spin on things…
Suppose your FRA is 66, and your FRA benefit is $2,000 a month. You could wait until FRA, or you can start drawing your SS benefit at age 62. If you did so, you would only receive $1,500 a month (a 25% reduction to your FRA benefit of $2,000). So taking SS benefits at 62 seems to be costing you $500 a month, right?
Not exactly.
If you were to receive your $1,500/month benefit at age 62, you would receive $72,000 by the year you turn 66 (FRA) ($1500 x 12 months x 4 years = $72,000).
Even if you don’t grow that $72,000, you’re still $72,000 ahead of the guy who waited until age 66 to take his full SS benefit of $2,000.
If you didn’t take Social security early at 62, but instead waited until 66, you would make $500 more a month, but how long would you need to make $500 per month in order to reach $72,000?
Doing the math, it would take you 12 years to catch up to where you could have been had you taken the $72,000 before age 66 ($500 x 12 months x 12 years = $72,000).
Is that “BAD?”
It’s neither good, nor bad. It simply is what it is.
Above I quantified it in terms of time. We can also describe 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 $72,000 into Social Security “stock”! You could’ve had that $72k, but instead you INVESTED it back into Social Security in exchange for a larger payout. What was the return on that $72k investment?
Doing the math, since it’ll take you 12 years to break even, 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% rate of return. An investment that triples in 36 years has a 3.2% rate of return.
So practically speaking, what that means is that if you don’t take SS at 62, but instead take it at 66, you are striving to receive a 3% – 3.2% return on investment.
Or we can state it the other way…
If you take SS early at 62 and you invest that money and yield a 3% – 3.2% rate of return, you will have been better off taking it early than waiting until FRA.
Another point to consider:
Should you choose to wait until 66, you will only truly yield a 3% – 3.2% return if you live 24 – 36 years respectively! By that point you’ll be age 90 or 102. 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 $72k!
Social Security after FRA:
There is no more earnings test once you reach FRA. So you’d figure that everyone would start taking their SS at FRA, right? Well, at that point there are another two points to consider.
- Delaying receipt in order to receive an increased benefit
- Not taking your own Social Security benefit but instead taking your spouse’s.
Delaying receipt in order to receive an increased benefit:
If you delay your receipt of SS beyond FRA your SS benefit gets increased by about 8% per year. The most you can delay is up to age 70, and at that point you may be entitled to 32% more of your FRA SS benefit.
Taking your full benefit at FRA vs. taking the maximum benefit at age 70 is similar to the “investment” consideration from above. Let’s illustrate:
If your age 66 benefit is $2,000/month, then your 70 benefit will be $2,640/month (32% more than the FRA benefit. 32% of $2,000 = $640).
If you were to receive your $2,000/month benefit at age 66, you would receive $96,000 by the year you turn 70 ($2000 x 12 months x 4 years = $96,000).
Even if you don’t grow that $96,000, you’re still $96,000 ahead of the guy who waited until age 70 to take his maximum SS benefit of $2,640.
If you didn’t take Social security at 66, but instead waited until 70, you would make $640 more a month, but how long would you need to make $640 per month in order to reach $96,000?
Doing the math, it would take you 12.5 years to catch up to where you could have been had you taken the $96,000 before age 70 ($640 x 12 months x 12.5 years = $96,000).
Once again, aside from calculating the time to break even, we can also describe it in terms of rate of return.
If you decide NOT to take SS at 66 (FRA), but instead wait until 70, you essentially are CHOOSING to invest $96,000 into Social Security “stock”! You could’ve had that $96k, but instead you INVESTED it back into Social Security in exchange for a larger payout. What was the return on that $96k investment?
Doing the math, since it’ll take you 12.5 years to break even, that means it’ll take you 25 years to double your investment or 37.5 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 practically speaking, what that means is that if you don’t take SS at 66, but instead take it at 70, you are striving to receive a 2.88% – 3.06% return on investment.
Or we can state it the other way…
If you take SS at 66 and you invest that money and yield at least a 2.88% – 3.06% rate of return, you will have been better off taking it early than waiting until FRA.
Don’t forget: Should you choose to wait until 70, you will only truly yield a 2.88% – 3.06% return if you live 25 – 37.5 years respectively! If you don’t anticipate living into your late 90s then you certainly will have been better off taking the money at 66. This way, even if you die at 70, your family will inherit $96k!
Not taking your own Social Security benefit but instead taking your spouse’s:
But wait! The decision to delay and boost Social Security can actually get a little more sophisticated than what we just described when we include your “spousal” benefit. Let me explain.
A spouse, even if they have never paid into Social Security, is entitled to a percent of their married spouse’s SS – a maximum of 50% while the married spouse is alive, 100% when married spouse is dead. If the married spouse delays receipt of their SS beyond FRA, that will boost their own SS benefit as well as the spousal portion.
To illustrate: Joe and Kim are both FRA. Joe’s SS benefit is $2,000 a month, Kim’s is $1,800 a month. While Joe is alive, Kim could get 100% of her own SS, or 50% of Joe’s benefit. OR Joe can choose to get 100% of his own, or 50% of Kim’s.
(Please note the “OR” above. According to current law, only one spouse can elect to receive their spousal share, and not take their own. The other spouse will no longer have this option.)
Should Joe take 100% of his or 50% of Kim’s? 100% of his is obviously greater, but if he takes 50% of Kim’s, that will enable him to delay taking his own. Every year he delays, his benefit gets an 8% boost. At age 70, his $2,000 a month will have increased to $2,640 a month. Kim all the while could be taking her own benefit of $1,800 a month and should Joe pre-decease, which is the statistical likelihood, Kim can then continue Joe’s $2,640. If you run the figures in this example, Joe’s receipt of 50% of Kim’s until age 70 actually translates into more total income should at least one of them live to age 79. Bear in mind that statistically 50% of couples have either a husband or wife reaching age 92! Obviously, this too is not a one-size-fits-all scenario. But it certainly is a question which you’ll want to answer when planning for retirement.
All the Best!
~Stephen
