When it comes to Social Security and retirement, you may have conflicting viewpoints: On one side, you hope to start collecting your benefits as soon as you’re eligible, or maybe you’re concerned you’ll need that income sooner due to the coronavirus pandemic. On the other side, you know that if you wait, your monthly benefit amount will increase.
While it does make sense to wait as long as you can, Rob Arthur, First Vice President/Manager of the Federal Benefits Consulting Group, Wells Fargo Advisors, recommends you reevaluate your situation every year in retirement before deciding whether to continue delaying getting benefits.
“If I try to convince a 62-year-old to wait until 70, I’ve lost my audience immediately,” Arthur says. “That’s why I believe so strongly in this year-by-year approach.”
One item you need for that annual retirement review: a current copy of your Social Security benefit estimate from ssa.gov. This provides personalized estimates of future benefits based on your real earnings and lets you see your latest statement and your earnings history.
Here, Arthur outlines a comparison of claiming now vs. later and offers key considerations as you review your strategy each year.
Comparison: Claiming sooner vs. later
Let’s start with a hypothetical example: John Doe was born in 1960 and was earning $200,000 a year when he retired. He decided to start receiving Social Security benefits as soon as he became eligible at 62, or five years before he would receive full retirement benefits. His monthly benefit in today’s dollars is $2,106.
If he had delayed receiving benefits until he was 70, he’d receive $1,700 more a month, or $3,806. And he would make up for the eight-year delay in not taking any benefits in about 10 years. (And because one out of every four 65-year-olds today will live past age 90, according to the Social Security Administration1, the long-term benefit could be substantial.)
“Unlike personal assets, Social Security is unlimited,” he says. “As long as you’re alive, the checks should continue to come.”
Make wellness a deciding factor
Your health can play a big role in helping determine when you should start taking benefits. Do your loved ones live long lives, or has everyone succumbed to illness before age 65? “It’s not the most accurate indicator of what’s going to transpire in the future, but it can have some bearing,” Arthur says.
“If you’re in reasonably good health, that counsels in favor of waiting,” he continues. “If you’re in poor or guarded health, that counsels toward drawing benefits sooner rather than later.”
Do you have enough income?
Another key factor is having other sources of income to live comfortably in retirement without needing Social Security benefits. He says you should consider the guaranteed rate of return Social Security offers: 6.25% – 8.00% (plus a cost-of-living increase). That’s better than the guaranteed rate of return available in today’s market.
“I ask my clients: ‘Is that an attractive return to you over the next 12 months?’” he says. “And given the current interest rate environment, the response is typically a resounding yes.”
Considerations for married couples
Arthur advises married clients to look at multiple factors when determining the timing for each spouse to claim Social Security benefits.
For example, if you’re working part time or seasonally, your Social Security benefits may be dramatically lower if your partner is working full-time. It’s still wise for both of you to wait, if possible.
“Not only does it increase the size of the benefit that the [higher-earning] individual personally receives, but it also increases the size of what’s known as the survivor’s benefit that the [lower-earning] spouse could draw if the other spouse passes away,” Arthur says.
Keep in mind that the current average life expectancy of a 65-year-old man is about 84 years, while a woman that age can expect to live until around age 86, according to the Social Security Administration1.
What about taxes?
When it comes to when to claim Social Security benefits, Arthur advises his clients not to focus primarily on the tax ramifications.
“The vast majority of people that I counsel, their marginal tax rate in retirement will be fairly constant,” Arthur says. “If retirees were to take their Social Security benefit at 62, what I typically see is their marginal tax rate is exactly the same or approximately the same as it would be if they claimed the benefit at age 70. I want [them] to focus instead on working to maximize the net cash flow over the remainder of their lifetime.”
1Benefits Planner/Life Expectancy, Social Security Administration, https://www.ssa.gov/planners/lifeexpectancy.html