One of the most important retirement decisions facing most Americans is: WHEN TO START SOCIAL SECURITY BENEFITS. Conventional wisdom has always been “take it as early as possible — age 62”. Why? Several reasons are given: (a) it might not be there if you wait; (b) you can take the benefits and invest them and have more money later; (c) I might die early and never get a dime.
About three-fourths of Americans have heeded this advice and for most it was, or will prove to be, a big mistake. Why? There are several reasons: spousal benefits, higher benefits for delaying, penalties for starting early, penalties if you work while drawing benefits and are less than normal retirement age, and SS benefits get favorable income tax treatment.
Spousal benefits: If you qualify for Social Security benefits they will last the rest of your life — what’s more, if you’re married and your spouse is entitled to a lower amount, she/he will “step up” to the higher amount at your death. The spousal benefits say a spouse gets at least 50% (even if they paid zero into their SS account) of what the other spouse qualifies for AND the larger amount when the first spouse passes on. So by delaying your benefits your surviving spouse could get a bigger SS check every month for the rest of her/his life. Since “break-even” is about age 80 and joint life expectancy is closer to 90 for a married couple age 62, the odds of getting more are overwhelming. In fact, if Las Vegas gave the same odds you’d be booking reservations today.
For every year you delay taking Social Security benefits beyond age 62, your benefits grow between 7.5% and 8.0% annually PLUS a cost of living adjustment (COLA) based on inflation. In the past 30 years inflation has averaged over 3% annually…so your SS benefits will grow by over 10% a year. Where else can you get an investment backed by the U.S. Government and pay you over 10% annually? Stop looking, they don’t exist unless you want to take loads of risks. So if you are healthy, married and can afford to wait, postponing SS until age 70 will pay great dividends. SS will be there because with 50 million current getting benefits and another 76 million (the boomers) coming of age, politicians who vote to do away with SS will be unemployed.
If you start benefits at age 62 (the earliest time possible) you get about 25% less than if you wait until your normal retirement age (age 66 for most 62-year olds). This 25% less is for the rest of your life AND COLA is applied to a lower amount to compound the injury. Again, postponing make a great deal of sense.
If you start Social Security before normal retirement age and continue to work, your benefits will be reduced $1 for every $2 you make over about $13,000 annually. Yes, you’ll get this back later but when you consider taxes and the time value of money you’ll be worse off.
The big reason to delay is because SS benefits are taxed differently than other income: it is never 100% taxed and it is easy to manage the taxes on your SS benefits. PLUS, if taxes rise you’ll want to have as much of your retirement money in tax advantaged places (like larger SS benefits) as possible. Which way to you think income taxes are headed? Let’s see: record federal deficits, fighting terrorism, rebuilding our highways, bridges & infrastructures, an aging population, cleaning up the environment, etc. which must be financed by the federal government with income taxes. No doubt in my mind…how about you?
You’ll have one chance to get Social Security right, so get all the info you can to make a good decision — most Americans haven’t and they’ll pay a lot more in taxes on their retirement money. Less money in retirement means less of a retirement.