By Eric Reich
Common advice from the financial advisor world is to always wait as long as possible before beginning to take your Social Security benefits. The most frequent reason behind that advice is that Social Security benefits increase by 8% per year. The longer you wait, the bigger your benefits are. While this makes a lot of sense in theory, it isn’t always the right answer for many people. There are many factors that need to be considered before deciding when to start your Social Security benefits. This week, let’s review the reasons why you might not want to delay your benefits.
For starters, let’s review the normal ages for taking Social Security benefits. For most people, benefit eligibility begins at age 62 (age 60 for widows/widowers) and can be taken any month after that date until age 70. Benefits cannot be delayed past age 70. Your intended benefit age, known as Full Retirement Age (or FRA), is between age 65 and 67, depending on when you were born. In theory, the age at which you take your benefits is intended to result in the same benefit paid to you over your lifetime. If you take benefits at age 62 vs. age 70, yes, your benefit is lower, but you received it for a longer time period. Based on actuarial life expectancy, this should result in the same total benefit either way.
The issue, however, is that nobody actually lives to their exact actuarial life expectancy. Because of this, it creates one benefit choice being better than another. Unfortunately, there is no way to know which choice was better until after you’re gone.
Who should wait as long as possible to take benefits? For starters, those in good health (who also have a family history of longevity) may be served by waiting. Also, those with limited financial assets, who will rely heavily on the monthly benefit amount for their retirement needs, should wait if possible. Those who will continue to work beyond their full retirement age may benefit from waiting as well. Those with a spouse who may need the higher benefit to live on once you are gone may be served by waiting as well since the surviving spouse receives the higher of the two benefits when the other spouse passes (no, you don’t get both Social Security benefits).
Those who may want to consider taking benefits sooner include people in poor health. For people in poor health, waiting typically does not serve them well. People who simply need the money should consider taking the benefits when available as well. While delaying benefits might be better for them, not everyone can wait to take their benefits. People who don’t need the money could choose to invest their Social Security benefits to allow for a potentially large account value to pass on to the next generation, which is something the benefits themselves can’t do for most people otherwise. Lastly, those who are concerned about leaving money to heirs may want to take their benefits sooner. If you have a choice between spending your money now to delay Social Security benefits or taking your SS benefit and letting your other money grow, those who have their money invested in growth investments may be better served by spending Social Security money now. This allows your money to grow longer and potentially leave behind a larger inheritance. I’ve run the numbers many times. Most often I see those who delay benefits have a little more total income for themselves, and those who take benefits early have more left over for heirs. While these scenarios are not always true, they tend to work out this way more often than not.
A final thought is I would caution folks to not make your Social Security timing decision on fears that the fund may “run out of money” and not be able to pay your benefits. This is an extremely unlikely scenario as the Social Security trust fund only accounts for roughly 18% of benefits while the remainder comes from the current taxation of workers. If the government were to run out of money in the trust fund, they could simply rely on the ability to increase taxes to make up the difference or require benefits to be delayed for younger workers. That’s something that probably should have happened years ago since life expectancies have risen substantially over the last 75+ years. Regardless of the path you intend to choose, seek advice from a professional to help you walk through the different options in order to help make the best choice for you and your family.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
