Social Security: Why You Would Want to Claim Benefits Early, and Why You Wouldn’t

When it comes to Social Security and when to start taking your benefits, there are 3 important ages to keep in mind: 

  • Age 62: The earliest you can start receiving Social Security benefits, in most cases.
  • Your Full Retirement Age: The age, determined by your birth year, when you are eligible to receive full, undiscounted benefits from Social Security.
  • Age 70: The age when benefits stop increasing. 

If you’re eligible for Social Security retirement benefits, you can start taking them as early as age 62, but you don’t have to. The amount you receive on a monthly basis increases the longer you wait, until you reach age 70, when increases stop.

Here's a simple illustration based on an assumption that your calculated full retirement age monthly benefit is $2,000. For example, if your full retirement age is 67 (i.e., you were born in 1960 or later), your benefit will be reduced by 30 percent if you file your claim at age 62. A total of $2,000 per month becomes $1,400 per month. Each year you wait between 62 and 67 to start benefits, the benefit amount climbs toward the full $2,000. For each year you delay filing past your full retirement age, your benefit will climb by 8 percent, all the way up to age 70. So, if you waited until age 70, $2,000 becomes about $2,650. These simple illustrations ignore the impact of cost-of-living adjustments that would be occurring along the way.

While this is important to understand, the decision of when to start taking your benefits should not just be a financial one. Your plans for retirement, your life expectancy and any other forms of income you’ll receive in retirement should be considered before making a decision. 

 

Don’t guess when it comes to Social Security. Contact the team at Linscomb & Williams and start a conversation.

 

Why You May Want to Claim Benefits Early

In our experience at Linscomb & Williams, there are 3 major reasons why you might want to take your benefits early:

1. You’d Have to Take Withdrawals from Your Retirement Accounts Early

Social Security is one of the income streams most retirees rely on in retirement. If taking your Social Security benefits early allows you to keep your retirement accounts protected for longer, this can possibly mean it may make sense to claim early. This sort of decision, however, has many variables and is most assuredly one worth discussing with your financial advisor. It would never be to correct to simply reason, "I'm taking Social Security early so I can let my IRA/401(k) continue to grow." That's an over-simplification! 

2. You Need More Money in the Early Years of Retirement 

It’s a common generalization that your expenses will decrease when you retire. While that might be true, many times, that’s not the case, especially in the first few years of retirement, when many retirees decide to relocate (moving can be expensive), take extensive trips or spend a lot of time visiting with family and friends. Once settled, these costs may then decrease. 

Say for example that you plan to spend your retirement in Houston, Texas, but you currently live in California. You may need extra cashflow to pay for the move, which can involve multiple trips as you get settled in, and then several excursions as you tour your new environment. As you get comfortable, the urge or need to travel may decrease.

If this is the case, early Social Security payments can provide an extra financial boost you need early on. Sure, your monthly check would be higher if you had waited, but you may not need the extra money in your later years. Again, there are many variables that come into play and sound financial counsel is a good idea!

3. You Have Poor Health or a Low Life Expectancy

If you have reason to believe that your life expectancy is significantly below average, it can make sense to take your Social Security benefits early, as you may not live long enough to experience up to 8 percent returns on delayed commencement of benefits. 

Because your Social Security benefits continue until your death, and your retirement funds are exhaustible, it can make sense to file your claim with Social Security first and then turn to your retirement account funds as needed. This way, you have immediate income while retaining at least some of your retirement savings in case you live longer than expected.

All that said, our experience from 50 years of working with retiring clients is that there is a human tendency we all seem to have to under-estimate our reasonable life expectancy. If you don't have unusual health issues that bear on the decision, it is prudent to look at updated life expectancy tables in weighing your choices. 

Why You May Want to Claim Benefits Later

Our multi-credentialed team has worked through this decision literally with thousands of families. From this experience, we judge that there are 4 reasons why you may want to wait:

1. You Can Stagger Benefits with Your Spouse

If you are married, you have the opportunity to coordinate your benefits with those of your spouse. Doing so can help you obtain the maximum amount of money from Social Security. This strategy can be especially beneficial when a younger spouse has a lower earnings record. 

Without going into the math here, the dynamic is that a higher benefit for the older spouse can be perpetuated as a "survivor" benefit for the lifetime of the younger spouse. 

We saw the impact of this in the case of a long-tenured client of our firm who recently passed away at the age of 95 in 2019. She perpetuated this higher survivor benefit, including inflation adjustments, for 33 years following the passing of her husband, who was older in 1986. This can add up to a difference that may total six figures.

For more on this, read our recent blog post: Retirement in Houston, Texas: Couples May Want to Take a Staggered Approach.

2. You’ll Continue to Work in Your 60s 

You may be able to afford to postpone claiming your Social Security benefits if you continue to work past age 62. Since you can live off the income from your job, you allow your benefit to grow for each year you delay filing your claim. 

The Bureau of Labor Statistics estimates that, by 2024, 13 million Americans aged 65 or older will be working. The number of workers in this age group is expected to have the fastest rate of increase over any other group. If you continue to work in your 60s, you’re in wide company. 

If this is the case for you, read our recent blog post: Working in Retirement: What to Consider.

3. You Have a Longer Life Expectancy

When you take your Social Security benefits early, you receive less each month than you would if you had waited, but you have the potential to receive your benefits for a longer period of time. Waiting to file allows you to receive more per month, but you may do so over fewer months.

Bear in mind that you lock in your annual benefit when you file your claim (except for annual cost-of-living adjustments). If you have longevity in your family, you may want to postpone your claim to help ensure the money you do collect will be enough to live on throughout the remainder of your life. 

Talk to a financial advisor to determine your breakeven age – the age at which the total of the lower benefits from early filing is equal to the amount you would have collected if you had waited to file until later.

4. Other Motivations to Wait

It may also make sense to delay starting benefits in your 60s to facilitate better long-run tax planning for your family. During the window between age 62 and age 70, you are always in a position to get a higher monthly payment by waiting to start the flow from Social Security. This means there is an opportunity during that window of time for some wise income-tax planning.

For example, you might delay Social Security because you want to drain some funds from tax-deferred IRA and 401(k) accounts during those years, when your tax bracket might be lower. This will avoid larger IRA/401(k) balances down the road that force higher minimum annual distributions once you turn age 72. Depending on your situation, these years before Social Security may also give you opportunity to do some Roth conversion of some of your pre-tax retirement account assets to enhance your long-run security and personal estate planning.

These other motivations for waiting require careful and detailed financial modeling and you should loop your financial advisor into the conversation.

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Heidi Davis, CPA/PFS, CFP®

Heidi Davis, CPA/PFS, CFP®

Heidi Davis is a Managing Director and Wealth Advisor at Linscomb & Williams.

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