Should I Delay Taking My Social Security Benefit?
Tim emphasizes the importance of strategically claiming Social Security benefits to maximize retirement income. He highlights factors to consider, such as health, life expectancy, income, and spousal benefits, and stresses the importance of combining Social Security benefits with nest eggs to provide a source of guaranteed income.
Should you delay taking your Social Security benefit? And should you focus on your break-even analysis in retirement?
Of course, your Social Security benefit break-even analysis is something to be mindful of, but there are many factors to consider when determining activation of your benefit.
I often hear those approaching retirement say things like “I’d have to live to age “x” to make it worth it to delay benefits.” And while a break-even analysis is useful for comparing any investment, I like to frame Social Security as insurance in case we live longer than expected, rather than as an investment.
As you probably know, your Social Security benefits are generally based on your average income over your lifetime and your age at the time you file for benefits, and also whether or not you are entitled to survivor benefits.
You can start claiming benefits anywhere between ages 62 and 70, and as low as age 60 for survivor benefits. The longer you wait, the higher your monthly payment will be.
You can elect to take lower payments over a longer period of time by starting earlier, or you can take higher payments over a shorter period of time by delaying benefits.
Social Security as Insurance
Since most of us don’t have a fortune teller to tell us how long our retirements will last (at least credibly), I generally recommend treating Social Security as the insurance policy that it was intended to be.
What do I mean by that? Social Security is also known as Old Age and Survivors Insurance (OASI), and is basically a safety net (or an insurance policy) that covers you in the event that you live longer than expected.
To use an extreme example, you may not have planned for your nest egg to cover all of your expenses if you live to be 110, but Social Security will continue to pay you, even if you do live to be 110+.
Reasons to Claim Social Security Earlier
Now, of course, there are instances where some people should take their benefit as early as possible. Here are a few:
- If you aren’t in good health and have a short life expectancy, you want to get as much as possible as soon as possible.
- If your spouse does not qualify for a benefit, or it is very low, you may want to file for your own benefit to unlock a 50% spousal benefit at full retirement age.
- You just need it. Unfortunately, Social Security has become the only source of income for many in retirement, and maybe you are unable to work until full retirement age or age 70 to maximize your benefit.
Real-life Scenario
Let’s say we have a couple, and the husband is 62. He’s getting ready to retire and wants to claim Social Security benefits immediately to supplement the household income. His wife is 57 and will still be working for several more years.
For their situation, we suggested the husband wait until at least full retirement age, or even age 70, to claim Social Security. Why, you ask? Well, there are, of course, many factors to be considered.
For this couple, the husband is the higher income earner, and his Social Security benefit will be about double what his wife’s benefit will be. His wife is 5 years younger than he is, and even though they are both in good health, she is statistically likely to outlive him by several years.
His wife’s income only covers about half of their current living expenses. So, this means if he does not claim Social Security now, they will have to withdraw money from their nest egg to make ends meet until he does. He’s concerned that their nest egg will be depleted more than he wants it to be.
After hearing our recommendation, the husband said he had done a break-even analysis and he had determined that he would have to live until at least age 80 for it to pay off and get more money by delaying his Social Security benefit. This is common. The break-even age is generally between 79 and 82.
He also said he would rather have the Social Security money now and save their nest egg for later. If he could guarantee a high rate of return for their nest egg, perfect, but he can’t. He’s thinking of Social Security as an investment, but it really isn’t.
Using your Nest Egg with Social Security
Why do we purchase home insurance; why do we purchase car insurance; or any insurance? We purchase insurance to cover the unexpected. Social Security is not an investment designed to provide you with the most income over your lifetime.
Even though we want to try to maximize the most income you can get, we also want to hedge and ensure you have a good source of income in the event that you live longer than expected.
A nest egg is a specific amount of money that is usually invested, and we hope it will grow over time. But there is nothing to replenish that fund once you begin taking significant withdrawals.
It can grow over time and provide an increasing income stream. But typically, your nest egg is not guaranteed to retain value and/or grow over time. We hope it will, and there is a strong historical probability that it will, but it isn’t guaranteed.
Social Security Insurance is adjusted for annual cost of living increases, and this is currently an automatic action that is coded into law. Also, it will provide income for your entire life.
If your spouse lives longer than you do, your spouse will continue to receive the higher benefit for the rest of their life.
Bottom Line
If you have been saving during your working years to pay for your retirement, now is the time to thread the needle and try to maximize your retirement income, while at the same time hedging with guaranteed income sources like Social Security.
And remember, for every month that you delay claiming Social Security, you will have higher income for the rest of your life, and possibly your spouse’s life.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation.