Considering taking Social Security at 62? Sure, why not? After all, it’s the most popular age for folks to start drawing since for most people it’s the first time they’re eligible to start. You just retired and you no longer have your paycheck coming in, and Social Security is just meant to help pick up where your job left off, right? Not necessarily. This is a very dangerous way to look at things when it comes to your retirement income. You shouldn’t be looking at just your situation today or even a few years from now, but you should really be considering your financial picture for the rest of your life. After all, that hard earned nest egg that you spent 40 years trying to build has to last as long as you do. Here are 5 reasons to wait to start your Social Security benefits, and why this decision is the most important financial decision you can make for retirement.
You minimize "longevity risk"
Longevity risk is simply the risk that you will outlive your assets; it’s the risk of running out of money in retirement. This is the biggest fear that retirees have today. Maximizing your Social Security income helps minimize the chance of this happening. Social Security is guaranteed by the federal government to last the rest of your life. It’s basically like a pension that you get from an employer when you retire. Your Social Security income increases the longer you wait to start receiving it. You can start anytime between 62 and 70, and the difference in the amount between starting at the two different ages is 76%! This means if you would’ve started getting $1,000 per month at 62, you can get $1,760 if you wait to start til age 70.
Now you’re thinking “Well, if I wait for 8 more years, that’s 8 years I don’t get any benefits; what do I do for those 8 years?.” Spend down some of your investment assets. One way to look at doing this is you’re essentially buying more lifetime income from the federal government. The money that you have to spend down from your IRA, for example, over the number of years that you decide to wait to collect benefits is literally guaranteeing you a larger Social Security pension the rest of your life. Even though waiting to claim depletes your retirement assets faster at first, over the long term it takes much more pressure off your portfolio.
You can get a bigger raise every year
Social Security income is not only guaranteed by the government the rest of your life, but you will receive increases over this time as well. The increases are called cost-of-living-adjustments or COLAs. There is not a COLA every year, necessarily. COLAs are based on whether the CPI-W increases or not year-over-year. This consumer price index is based on the cost of a basket of goods and services consumed by a working segment of the population. So, the COLA is based on how much of an increase there is in the cost of these goods and services. Although, there has been little increase in these goods and services over the last 7 years, over a 30-year planning time frame your Social Security income will increase significantly. By maximizing your base Social Security amount, this will increase the dollar amount of any COLA you get every year. If there is a COLA of 3% in a given year, 3% of $1,000 gives you a $30 raise, but 3% of $1,760 gives you almost a $53 dollar raise. These differences really compound over time.
You can leave a larger benefit to your spouse
Considering when to draw Social Security for a single person may not be that big of an issue, especially if that person is not healthy and/or has a family history of parents and siblings passing away at a young age. In their cases, it actually may be best to start drawing earlier rather than later. However, even if one spouse has a short life expectancy, it’s still probably best for them to wait as long as possible to claim Social Security benefits, especially if they have been the main breadwinner of the two.
With some slight exceptions, the general rule of thumb is that the surviving spouse keeps the bigger of the two Social Security incomes, and the smaller one just falls away. So, it’s very important for the spouse with the larger primary insurance amount (PIA) to wait as long as possible to maximize his or her benefits. If he or she happens to live longer than his or her spouse, the survivor simply keeps this larger amount and the smaller benefit of their late spouse goes away. However, if the higher earning spouse passes first, the surviving spouse gets to keep this maximized benefit for life. Doing this is even more important in light of the fact that widows are one of the largest demographics in poverty in the U.S. Most baby boomers have households where the male has the larger PIA between the two spouses, so leaving their widow with as large of a monthly income as possible helps minimize the chance she will become impoverished.
You can pay less in taxes
I go into the detail of how Social Security is very tax-advantaged in my article on taxation. Anywhere from 0 to 85 cents of every Social Security dollar is taxable, compared to 100 cents of every dollar you withdraw from your IRA. The exact percentage of your Social Security that is taxable is determined by a formula that looks at all of your income sources together. And, the larger the percentage of Social Security is in this total, the smaller the percentage of that Social Security income is taxable. So, basically, the more you can increase your Social Security income and decrease the amount you have to take from your IRA, the less you’ll have to pay in federal income tax. This can result in reducing your taxes by thousands of dollars each year.
You are left in a better position if you do run out of money
Although maximizing your Social Security takes pressure off of your retirement portfolio and minimizes the chance that you will run out of money, it doesn’t eliminate the possibility. What it does, though, is improve your situation if you do run out. Consider two identical retirees, one of whom started claiming benefits at full retirement age of 66 for $1,500 and the other who waited til 70 to claim almost $2,000 per month. Let’s say both retirees exhaust all of their retirement savings by age 88. By that time both of their Social Security incomes have doubled due to the compounding effect of the COLAs over the years. Who is left in a better situation? I’d rather be the guy who waited and now collects $4,000 per month compared to the one who started his benefits at 66 and only gets $3,000 per month.