First thing first, if income from Social Security is all you are relying on to live and we mean really live in retirement then we probably have a problem. Second thing second, no matter what people say, Social Security is not going away. It might be, scratch that, it will be altered in some form or the other. So if you are 40 and if you see that you are going to receive X amount each month at full retirement age (67), it’s prudent to plan for 75% of that income. 50 and above, no reason to fret. You are likely to get all that’s stated.
Income from Social Security should be treated like an annuity, replacing some or all fixed-income investments from your portfolio which you might otherwise have had to hold. And at today’s low rates, that’s a big chunk. The present value of that annuity could easily exceed a million dollars in retirement so the fact that there is this expected income stream coming in the future gives us added ammunition in not being overly conservative in designing your financial plans.
Back to the question at hand, at what point should you start taking Social Security? You are allowed to take it at age 62, you are supposed to take it by age 67 but you can delay taking it till 70. And there is a big difference between the three age points. Your full Social Security benefit, whatever that number is and it differs from person to person, can be found on the first page of your statement you can get from SSA.gov. And let’s assume that number is a dollar. You can take that benefit at age 62 but if you take it at 62, you are going to get a lot less than that dollar because you are taking it early and by taking it early, you are locking in that lower benefit for the rest of your life. So you can take it sooner and you get less or you can wait till age 67 and get your full benefit or you can delay taking it till age 70. If you do that, you get 32% more or $1.32. It doesn’t make any sense to wait beyond age 70 because that amount gets capped for the rest of your life.
So what’s the best time to take it? At 62, at 67 or at 70? The answer to that very simple question is very complicated. It has to do with your marital status, your income, it has to do with whether your spouse has an income, age difference between you and your spouse, it has to do with your children and the number of children and their ages, your life expectancy, your spouse’s life expectancy. A ridiculous number of variables and that’s why an in-depth analysis is required. We are working on a probability-based tool that takes into account many of these variables and come back with a decision so stay tuned.
But a general guideline to consider – if you take the smaller amount at 62, you are better off than waiting until you are 67 for 13 more years. In other words, you are better off until around age 75. If you know you are going to die prior to age 75, take the money at 62. Wish we all knew that but we can calculate the odds (that tool again). If you do plan to live beyond age 75, wait until you are 67. So are you going to live till 75? Of course you can’t answer that question for sure and that’s the dilemma. Let us phrase it in a way that might help you to better answer that. If you are 62 and you start taking Social Security, do you actually need that money? Would it make a material difference in your quality of life if you received that money now? Would you do things you otherwise would not be able to afford to do? If no, then don’t take the money.
But if you are struggling to pay your bills or if you are constantly denying yourself that cocktail or that dinner or that cruise or if you do go on that cruise, you get an inside cabin because you can’t afford an outside one with a balcony. If there are grandchildren you love to spoil more than you are able to because you don’t have the money then go ahead, take the cash. But if it won’t make any material difference in your quality of life because you have ample other resources – pension income, income from investments etc. and if your expenses are low enough that this additional money from Social Security would not make a big difference in your life than wait until 67 or if you really can, till 70.
Stay tuned for that tool though.
Image credit – Miwok, Flickr