When to Take Social Security Benefits

Stocks were basically flat yesterday after Tuesday’s strong rally.  Some smaller economic releases like the ADP private payrolls report and the ISM services data were softer than expected, but the news from the Fed’s ‘beige book’ was modestly positive.  All of the reports included the negative impact of this winter’s cold weather.

I am frequently asked, ‘When should I take Social Security?’

It’s a hard question to answer because there are no hard rules since it really depends on how long you will live, a question that no one knows the answer to or likes to think about.

Benefits can start as early as age 62 and can be delayed until 70, and for most people, full retirement age is between 65 and 67.

Generally, I am a ‘bird in the hand’ kind of person, preferring cash today versus cash in the future.  For Social Security, though, I don’t necessarily think that’s the right answer because the age when you start receiving benefits will greatly impact the payments that you receive.

Imagine that your full retirement age is 66 and you expect to receive $1,000 per month.  If you take early retirement benefits at 62, the benefits drop down to $750, which means that waiting grows your benefit by 7.5 percent per year (that rate can vary depending on the year you were born).

I would love to promise a return like that, but getting in the form of a government guarantee is a much better deal.  Compare that to a four-year US Treasury bond that yields about 0.55 percent these days.

In addition to the benefit of waiting, there are a number of factors to consider.

First, if you’re still working, there are limits on how much you can earn between age 62 and full retirement and still get all of your benefits immediately.

There are multiple formulas (again, a million caveats), but if you are under the full retirement age, they deduct $1 from your benefit for every $2 that you earn above the limit, which is $15,480 for 2014.

The good news is that when you do reach full retirement age, your benefits are recalculated and you get credit for the deduction, so it isn’t a permanent loss.

Second, you’ll want to consider your family history related to longevity.  On average, a man who turned 65 in 2013 can expect to live until you’re 84 or so on average.  But, that’s just the average – 25 percent of those men will live past age 90 and 10 percent will live past 95.

If you have longevity in your family, it pays off to wait before taking benefits (on average).  Conversely, if you know something important about your current heath, it might make sense to start taking benefits earlier.

A third factor worth thinking about is whether or not you should keep working simply for the health insurance.  I have no comment on Obamacare, but for the most part, you can’t apply for Medicare until you are age 65, so it may make sense to keep working until you’re eligible for that.

It should be obvious why the answer to when you should take Social Security payments is, ‘it depends.’  I haven’t even got into the really complicated issues for spouses, when you might be eligible on another worker’s record, as a widow, widower, a surviving divorced spouse, etc.

Not only are there many different rules, but also you have to start thinking about joint life expectancy.  There’s enough of an unknown in your own life expectancy, but adding another person doubles the uncertainty in my opinion.

We have software and experience that can help with some of these decisions and I also highly recommend a visit to the Social Security office.

I haven’t been myself, but all of the reports I have heard from clients is that the officers there know the rules, tips and tricks very well and offer sound guidance.  It’s apparently much better than the DMV.