Social Security & Early Retirement - Avoiding a Very Expensive Mistake
Many might consider the Social Security (SS) retirement benefit an integral part of early retirement, since you can begin receiving SS benefits at age 62. However, there are potentially hundreds of thousands of reasons, (as in dollars), why you may want to consider applying for it later. It’s incredibly important to make the best decision regarding your SS benefit because you really only have one time to make the right decision; for in most cases, once you’ve made the pivotal decision you are stuck with it for life.
Today’s blog continues a series that focuses on the financial planning strategies for early retirees. You can find the other important early retirement topics here:
• “Are you on Fire Financially” — Introducing Early Retirement
• “It’s All About the Benjamins” — Income in Early Retirement
• “Let’s have Heart to Heart About Healthcare in Early Retirement: Don’t Retire in Vein”
Now, back to the topic at hand. I’ve highlighted some details regarding your SS retirement benefit below:
• For those eligible, you can take your SS retirement benefit as early as age 62, as late as age 70, or anytime in between;
• The longer you wait, the higher your monthly benefit will be, as you will be taking it for a shorter period of time;
• Your benefit is calculated using your Full Retirement Age (FRA). For those born 1960 or later, your FRA is age 67*;
• Every year you take it earlier than age 67 it will decrease your benefit by 6%, whereas every year you delay it after age 67 it will increase your benefit by 8%*;
• Consequently, if your FRA is age 67 and you begin receiving SS at age 62, your benefit will be 30% less than your FRA benefit for the rest of your life*; and
• If you wait until age 70, your benefit will be 32% more than your FRA benefit for the rest of your life*.
For example: Let’s say your FRA is age 67 and your benefit at that age is $2,000/month or $24,000/year then:
• By taking it at age 62, your SS retirement benefit would instead be reduced by 30%, that’s $1400/month or $16,800/year. This lower benefit would be for the rest of your life.
• Applying it at age 70, your SS benefit would be $2,640/month or $31,680/year for the rest of your life. (Please note, this does not include the occasional adjustment for inflation).
Just how old do you need to live to break even?
After paying into SS for so many years, many people want to ensure they receive their retirement benefit and are tempted to apply for it early. But SS is in no danger of running out of money; below shows just how long you need to live to break even.
• For a median SS earner, if you apply at age 67, you will receive more in total by age 76 and 4 months than if you started at age 62.
• For a median SS earner, if you apply for it at age 70, you will receive more in total by age 80 and 5 months than if you started at age 62.
• By age 90, you will have accumulated $125,000 more dollars if you waited until age 67, and $222,000 more dollars if you waited until age 70 than if you took it at 62*.
So when should you take it as an Early retiree?
It really depends on one factor: what is your life expectancy? This is usually difficult to predict, but if your family history/DNA is good and you are in relatively good health, it’s likely in your best interest to delay applying for the benefit as long as possible.
If your health is good and you are considering taking SS at age 62 as part of your early retirement strategy, you really need to consider working longer. In retirement, people need to be wary of market volatility and inflation. Delaying applying for SS to maximize your benefit can greatly mitigate the effects of market fluctuations and general price increases.
What about taking it early and investing the difference?
Some people believe this is a potential strategy, but by applying for it later, your benefit will increase 8% every year guaranteed. If you think you can beat 8% every year for 8 straight years, (age 62-70), you should quit your day job and become a hedge fund manager. But seriously, the more years you wait to apply for SS, the better it will be for you if you have an above average life expectancy.
When should you take it at age 62?
If you have a shorter life expectancy, it would make sense to apply for SS early in retirement. However, your benefit will be permanently reduced, and you can only change your mind in the first 12 months of receiving it. Also, you will have to pay back the money if you do decide to stop it. Additionally, if you work while on SS, you will lose $1 of benefit for every $2 you earn above $18,960 (2021 numbers)**. In the year reaching full retirement age, your benefits will be reduced by $1 of every $3 you earn above $50,520 (2021 numbers)**.
Too Many Take It Too Early
According to the Social Security Administration, 34% of people apply for SS at age 62, and over 57% apply for it before full retirement age. Only 3.7% wait until age 70. In other words, most people are leaving a lot of money on the table. Those who are retiring early, because of great planning, can further enhance this planning by applying for SS as late as possible.
Strategies for married couples
For spouses with equivalent work histories and life expectancy, it may make sense for both of them to delay their benefits up to age 70 if possible. In other cases, especially when there are differences in work history, it might make more sense for the lower-earning spouse to apply earlier while the higher earner waits until age 70. The reason being is that at the death of a spouse, the surviving spouse has the option to receive their benefit or 50% of their deceased spouses’ benefit, whichever is greater.
Conclusion
For early retirees that have a long-life expectancy, it can pay you literally hundreds of thousands of dollars more by applying for SS at age 70. And if you and your spouse both wait until age 70, and each received the full SS benefit and live beyond age 90, it could amount to over $400,000 more.
However, there is no reason to make this decision on your own as there are many factors to consider when it comes to Social Security Retirement Benefits. For clients, I conduct a comprehensive review of their investments, health care, and retirement goals to ensure all factors are considered, so they make the best choice for them. If you, your friends, or family members have questions, feel free to reach out.
Best regards,
Jonny West, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Sources:
*JP Morgan Guide to Retirement - 2021; pages 8-11
