One of the key decisions a retiree will face—and one of the most common questions we receive from clients—is when to claim Social Security retirement benefits. There are several schools of thought regarding this decision, so we’ll dive into the factors to consider and look at the numbers involved, too.
Three factors to consider
#1 – Your health and family longevity
Charlie Munger famously said, “All I want to know is where I’m going to die, so I’ll never go there.” From a financial planning standpoint, when trumps where. Without the knowledge of when we’re going to expire, we must work with various assumptions and what-ifs.
When it comes to filing for Social Security benefits, your current health profile, life expectancy, and your family health history are important factors to consider. All things considered, a shorter life expectancy may necessitate claiming benefits earlier, while someone who has a family history of living into their 90s may want to delay receiving benefits if possible.
#2 – Your other retirement income sources and resources
Some people need to tap Social Security upon retirement to replace lost income, while others can live off their investment and retirement accounts in the short-term. The latter allows your Social Security benefit to continue growing as we discuss below.
#3 – Your perception of the Social Security system
If you think the Social Security system is doomed and will run out of money in [enter a year], then you may be inclined to claim benefits earlier than someone without those concerns. The Social Security program continues to be a hot button issue politically, as neither party has shown the political will to make changes to benefits so far. And that’s not to bag on this Congress; the same can be said going back 20+ years. In our opinion, when benefit adjustments happen, they likely won’t hit people already receiving Social Security retirement benefits—and likely not people within a handful of years from retirement either. As is usually the case, the can gets kicked down the road and younger people ultimately bear the burden.
Three common Social Security filing ages
Roughly a quarter of retirees wish they’d delayed taking their Social Security benefits, according to a recent paper published on the NBER website. So, let’s look at three of the most common filing timeframes and see if we can figure out why.
- As soon as possible (age 62) – The most common reasons I hear for claiming at age 62 are health-related, thinking the program will run out of money, and a general desire to begin taking money out of a system they’ve paid into for decades. Despite those reasons, most people are in far better shape by waiting to claim benefits. For someone who turns 62 this year and files, they will lock in just 70% of their full retirement age (FRA) benefit amount. In other words, there is a 30% reduction in benefits if you choose not to wait another 4-5 years. And once you claim SS benefits you can’t go back; this benefit is locked in place when you file.
- Upon full retirement age – This number depends on the year you were born, but most people fall between 66 and 67 years to be considered full retirement age. This is the age at which you receive 100% of your Social Security retirement benefit. Your benefit amount at this age also represents the maximum that your spouse will step into upon your passing, assuming it’s higher than their own benefit amount. If possible, we typically recommend clients wait until FRA to begin receiving their Social Security retirement benefits.
- Waiting until age 70 – Each year between your full retirement age and age 70 your SS benefit increases 8%. So, by waiting until age 70 you have in effect increased your benefit to roughly 130% of your full retirement age benefit. This is the main reason people wait to begin receiving Social Security until age 70. According to this study, more than 90% of filers should wait until age 70, yet only 10% of filers do so. If you have substantial 401(k) or IRA assets, there may be merit in living off these assets between retirement and age 70.
While these factors to consider and the common filing timeframes are helpful, we need to go a little deeper. (We’ve written about our disdain for mass financial advice in the past.) To help our clients answer the question: “When should I begin receiving Social Security retirement benefits?” we look through the lens of their financial plan. Our planning software offers a Social Security maximization analysis that shows the numbers specific to your situation and what it looks like if you file for benefits at various ages. As one of the most important financial decisions in retirement, you want to get this one right. Let us help. Please reach out to your Lead Advisor if you want to further this discussion.
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