When Should I Collect Social Security?
Have you ever watched a game show where the contestant reaches a certain point and can either stop and take home a guaranteed prize that is considerable or keep going forward for a much higher prize, but with the risk that he leaves with nothing? Often, I find myself cheering them on when they succeed with the latter strategy but thinking how foolish the decision was if they lose it all. Because with the benefit of hindsight, it’s very easy to judge the decision. But with so many unknowns, it really could have gone either way.
In retirement, we don’t have the benefit of hindsight either and must take calculated risks when making decisions that will impact our financial future. One of the most important retirement decisions you must make, is also one of the most difficult: when is the best time to collect your social security retirement benefit? Many people want to collect early, or at least at Full Retirement Age (FRA). “I earned this money and I don’t want the government to keep it.” While that’s understandable, you might be cutting off your nose to spite your face. Delaying your benefit can ultimately mean you collect significantly more. Unfortunately, there is no one right answer, unless you happen to know exactly the date you will die. But before you head to the psychic, there are a few guidelines you can follow.
Delay, Delay, Delay
In general, we would recommend waiting until FRA and even delaying beyond that to 70, if you can. Social Security is likely to be your only guaranteed income stream that has a Cost of Living Adjustment (COLA). Because Social Security has that COLA, it is important to get that initial benefit up as high as you can.
What does that mean? Let’s say you have a $2000 monthly benefit and you pay $10,000 in taxes and insurance, $5,000 in utilities and such, $5,000 in groceries and $4,000 in entertainment. Ten years from now, inflation has increased these expenses to $30,000/year. Without that COLA, you would have a deficit of $6,000 per year!
Delaying is particularly important when you have a spouse that could potentially survive you. The surviving spouse steps up to the higher benefit, so it is often best to let one benefit grow as large as possible.
How It Works: For every year that you delay collecting your SSI benefit past your Full Retirement Age (FRA), your benefit will increase by as much as 8%, putting a lot more in your pocket as time goes by. This increased benefit coupled with the COLA, will serve as great longevity insurance. Of course, you have to live longer to reap the benefits and you have to be able to continue working or support yourself off your assets in the interim.
If your health is good and your parents lived into their 80s or beyond, you will want to be the contestant that stays in the game.
Take the Money and Run
Delaying is not always going to be the best option though. Here are a few scenarios under which it would be better to start collecting at your Full Retirement Age (or even 62)
- You Need the Money
- If you have retired and have no other source of income, you may not have a choice but to collect early.
- Your Health is Poor
- If you delay collecting social security, there will eventually be a break-even point to justify making this decision. If you are in poor health though and have a low life expectancy, then you are unlikely to benefit from this strategy because your chances of breaking even are reduced greatly.
- Your Life Expectancy is Not High
- Family history or high-risk behavior, such as being a lifelong smoker, may also be another strong reason to avoid delaying.
How It Works: For every year that you collect early, your benefit will decrease by a certain percentage. If you collect at 62, this reduction can be as much as 25%. Sometimes, you won’t have the choice to wait until FRA or beyond, but if you can, delay collecting early.
If you’re less optimistic about how long you will live, you will want to be the contestant that takes the guaranteed win and gets out of the game.
Regardless of what you decide, you should never collect before your FRA if you are still working as you may be penalized once you reach a certain threshold.
There are some great tools out there for analyzing your situation and determining how you can maximize your social security benefit. For example, the AARP has a Social Security Benefits Calculator. As a mistake can be very costly, we highly recommend contacting a fee-only financial planner, if only to do this analysis.