Social Security - There Is No "Best Option"
Waiting to claim Social Security is not always the best option.
This advice is not as common as some other rules of thumb, but it is something we see fairly frequently. When weighing your options with Social Security, waiting until age 70 is often the best option. However, Social Security is such a multifaceted decision that you should not take this advice at face value.
For context, Social Security is income paid out at retirement that is based on your earnings history. If you have worked at least ten years, you are eligible, and must decide at what age you would like to claim your benefit. If you were born after 1960 your Full Retirement Age (FRA) is 67. However, you can claim your benefit as early as age 62, though your benefit is reduced by 8% for every year prior to your FRA (up to a 40% reduction). For instance, a $2,500 FRA benefit would be reduced to $1,500 if claimed at age 62. On the other hand, you receive an 8% credit for each year you delay your benefit beyond your FRA, up to age 70 which represents a 24% increase. That same $2,500 FRA benefit would be worth $3,100 at age 70.
From a breakeven standpoint, if you live past age 81 the numbers support waiting to age 70 to claim Social Security. As a result, the average person would receive the greatest benefit by waiting to claim. However, there are many factors that must be considered to make an informed decision.
Personal and family health history
While modern medicine has dramatically improved life spans, on average, you must consider your personal and family health history. Even if you reach age 81, you would have forgone three years of income in the earliest years of your retirement, and some would consider them to be the most vibrant. Ultimately, if you have health issues that would lead you to believe you are unlikely to live past age 81, claiming earlier may make sense.
Other sources of income
It has become less common to see traditional pensions, and this may alter the importance of Social Security within a financial plan. In some situations, you might be better off claiming Social Security at your FRA age and taking your pension to allow other assets continued time to grow and compound.
Changes in spending over time
For some people spending drops over time as they get into their 80s and 90s. More expensive hobbies such as travel and dining out tend to become less central to daily life. As a result, the need to maintain income at elevated levels tends to diminish over time. If you are financially secure, you may value the additional income in your 60s versus a larger benefit over your lifetime. An important caveat to this point is that many clients increase gifts to charity and family in later years, which may keep spending constant. Consider your situation and likely income needs accordingly.
Who should always claim at age 70?
Those who have under-saved for retirement. The primary advantage to Social Security is that you cannot outlive it. If you find yourself in your 60s with limited retirement assets, the best path forward is to continue to work, save if possible, and defer Social Security to age 70*. That would ensure you have an income source you cannot outlive.
The Social Security election a person or couple makes is about both quality of life and financial considerations. There are many factors that might lead you to elect to claim Social Security at FRA or even earlier, though we often recommend clients defer until 70 because it optimizes the benefit. Lastly, you should always consider a review of your benefits with a representative from the Social Security Administration to thoroughly understand your options before making a decision.
If you would like to discuss your Social Security benefits and election options you can contact us here.
*Not intended as financial advice. Consult with your own financial professional before making decisions about your individual situation.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.
