In meeting with clients and discussing Estate Planning and Elder Law issues, the topic of Social Security often arises. When can/should I retire? When can/should I file for social security benefits? I have recently done some research for a client looking into this issue. The answers are not as easy as you might think. Most people believe they should begin collecting as soon as they are eligible. If you can wait a few years or longer, however, you can in fact boost your benefits—and your spouse’s.
SOME DRAWBACKS OF TAKING SOCIAL SECURITY AT 62 vs. LATER:
1. A monthly benefit reduced by 25%.
2. Lower spousal benefits.
3. When you die, your spouse will receive less too.
4. Loss of opportunity to use advanced Social Security strategies for couples.
When it comes to Social Security, it can be tempting to take the money and run as soon as you’re eligible—typically at age 62. After all, you’ve likely been paying into the system for much of your working life, and you’re ready to receive your benefits. Plus, guaranteed monthly income is nice to have.
But it can be a costly move. If you start taking Social Security at 62, rather than waiting until your full retirement age (FRA), you will receive reduced benefits. FRA ranges from 65 to 67, depending on the year in which you were born. (See your full retirement age). And your annual cost-of-living adjustment (COLA) is based on your benefit. So if you begin Social Security at 62, and start with reduced benefits, your COLA will be lower too.
If you can afford it, waiting is often the better option. But, make sure to evaluate your decision based on how much you’ve saved for retirement and your other sources of income in retirement. While in general many people would benefit from waiting to, say, age 70 to take payments, others may need the income sooner and may lack the resources necessary to meet expenses during the delay period.
The longer you wait, the higher your benefit. Consider the following hypothetical example. Colleen is 62, with an FRA of 66. If she starts taking benefits at 62, she will receive $1,200 a month. If she waits until her FRA to collect, she will receive 33% more, or $1,600 a month in Social Security. If she waits until 70, her benefits will increase another 32%, to $2,112 a month. And if she were to live to age 89, her lifetime benefits would be about $38,000, or 13%, greater if she waited until age 70 to collect benefits.2 (Note: All figures are in today’s dollars and before tax; the actual benefit would be adjusted for inflation and would possibly be subject to income tax.)
If you plan to claim benefits based on your spouse’s work record, you’ll lose even more by taking benefits before you are 66. The benefit reduction is greater for a spouse—30% vs. 25%. For instance, if you’re the spouse of Colleen in the above example, you’d be eligible for only $560 a month at age 62, which is 30% less than the $800 a month you would get at your FRA of 66.
Your decision to take benefits early could outlive you. If you were to die before your spouse, he or she would be eligible to receive your monthly amount as a survivor benefit—if it’s higher than his or her own amount. But if you take your benefits early, your spouse’s Social Security will be less for the remainder of his or her lifetime.
Lost opportunity for couples
If you take Social Security early, you also won’t be able to take advantage of potentially valuable strategies for married couples—which are only available if you wait until your FRA of 66 to claim benefits.
For instance, with the claim and suspend option you can claim Social Security at your FRA, but suspend actual payments until a later date.1 With it, your spouse can draw spousal benefits immediately, while you continue working and the value of your future benefits keeps rising. This technique is especially useful if your benefits are higher than your spouse’s (because you’re older or a higher earner), and you’re not ready to retire but your spouse is. If your husband or wife, for example, won’t qualify for substantial benefits on his or her own, and hasn’t reached FRA, he or she can still collect spousal benefits while yours are suspended—but only if you have reached FRA. Meanwhile, your future benefits continue to grow. For more on this strategy: read Viewpoints: Social Security tips for couples.
Another option, claim now, claim more later, lets you claim spousal benefits now and then switch to your own benefit later.1 This strategy lets you keep building up your Social Security benefit while you receive payments based on your spouse’s work history. This may be appealing to couples who both want to retire. Instead of the husband and wife each claiming their own benefits, though, the person with the lower benefit (let’s say it’s the husband) starts collecting Social Security, and his wife claims spousal benefits—allowing her higher benefits to continue to grow. Again, you can use this strategy only if you wait until you’ve reached your FRA of 66 to claim your benefits. For more on this strategy, read Viewpoints: Social Security tips for couples.
It’s natural to want to retire as soon as you can, but it’s crucial to consider the earning and investing power you may give up if you stop working full-time and take Social Security at 62. If you leave a job with good pay and benefits, it may be difficult to ever regain that level of compensation if you need to return to work later. Of course, not everyone can keep working, but it is something to consider if you are healthy and have the opportunity to continue working.
Remember that while you are eligible for reduced Social Security benefits at 62, you won’t be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments. The average yearly cost of health insurance for a 62-year-old individual is $10,325, and prices have been rising much faster than inflation or Social Security COLAs.2 Why cut your benefits permanently just to pay for health insurance?
But there’s even more to the story. As you approach retirement, you’re often at the peak of your earnings—and of your ability to save more for retirement. Keep working, and you can make “catch-up” contributions to a tax-deferred workplace savings plan like a 401(k) or 403(b) or a traditional or Roth IRA. Catch-up contributions allow you to set aside larger amounts of money for retirement.
Moreover, if you stay on the job past age 62, your Social Security benefits will increase each year, up to age 70. Delaying retirement for even a few years can offer the potential to substantially increase the size of your retirement savings and, at the same time, increase your monthly Social Security income—and increase the chances for a successful retirement. Conversely, if you stop working at 62, you will stop tax-advantaged saving opportunities and cap your Social Security benefits—and you may need to begin to draw down your savings earlier.