- My aggregate benefits will be higher by beginning earlier unless I survive past age 83. Yes, people live much longer these days but I don’t want to do without now in order to pass on that risk to the government.
- I believe that the ordinary income rate that applies to a portion of Social Security benefits will increase over my lifetime but that investment income rates are less vulnerable. (I realize this is a simplistic way of summarizing this complex issue after you start to take into account state income taxes, Medicare surcharges, etc.
- Using earned government benefits allows my own investments to accrue investment gains that are likely to be taxable at a capital gain rate later, but only when realized.
- Since I made my earlier decision, the possibility that Social Security benefits will either be subject to a different COLI escalator or even reduced in absolute terms has increased substantially. This makes me feel even more comfortable with preserving my personal assets and collecting Social Security while I can.
However, while it might seem like a good idea on the surface, delaying benefits isn’t right for everyone. In fact, you could actually end up receiving less over a lifetime than if you claim earlier.
Breaking even with Social Security
The Social Security system is designed so that, in theory, you should receive the same total amount in benefits no matter what age you claim — you’ll either receive more checks (but smaller ones), or fewer checks (but bigger ones). Your break-even age, then, is the age at which your total lifetime benefits you’d receive by waiting surpass the amount you’d receive by claiming early.
However, for delaying benefits to be worthwhile (meaning you’ll receive more in total lifetime benefits than if you claim early), you’ll likely need to live into your 80s. Because even though you’ll be receiving bigger checks, you’re also missing out on many months of benefits that you receive if you claim at an earlier age.
For example, let’s say your full retirement age (FRA) is 67. You have the option to claim benefits any time from age 62 to 70, but if you claim earlier than your FRA, your benefits will be reduced. Likewise, if you wait until after your FRA to claim, you’ll receive a boost for every month you delay.
In this scenario, say the full benefit if you claim at 67 is $1,200 per month — or $14,400 per year. If you claim at 62, your benefits will be reduced by 30%, leaving you with $840 per month ($10,080 per year). Wait until 70, though, and you’ll receive an additional 24% on top of your full amount, bringing your total monthly check to $1,488 ($17,856 per year). Here’s what your total lifetime benefits will look like depending on when you claim:
|Age||Total Lifetime Benefits When Claiming at 62||Total Lifetime Benefits When Claiming at 67||Total Lifetime Benefits When Claiming at 70|
If you wait until 67 to claim, it will take until around age 80 before your total lifetime benefits exceed what you receive by claiming at 62. And by delaying benefits until 70, it will take until 85 to break even and receive more than you will by claiming at 67.
So if you live until 80, if you wait to 70 to claim benefits, you’ll receive only $178,560 during those 10 years. But if you claim at 62, even though you will receive less money each year, over the 18 years you get benefits, you’ll receive a total of $181,440 — not to mention the fact that you get an extra eight years to spend your benefits.
That’s not to say that it’s not beneficial to delay claiming benefits, or that it’s always a good idea to claim early. It depends primarily on how long you can reasonably expect to live. You can’t predict your life expectancy with 100% accuracy, but if you have reason to believe you won’t live until age 80, it’s probably a good idea to claim early to use your benefits while you still can. Likewise, if everyone in your family has lived into their 90s, it may be wise to delay claiming benefits as long as possible to take advantage of those bigger checks in your later years.
Deciding when to claim Social Security benefits is a highly personal choice, but that doesn’t mean you can’t be well informed about it. Sometimes it pays to wait a few years to claim. But other times, you’re better off claiming early and spending your retirement money while you still can.
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