Long before the Clash sang “should I stay or should I go,” Social Security recipients have asked, “Should I claim or should I wait?”
Back in 1982 when the punk rock tune was first released, the life expectancy in the United States was 75 years. It didn’t make sense to wait to receive Social Security. Or so it would seem.
In 2021, with the life expectancy of Americans approaching 80 and with those who have already made it to age 62 expected to live another 20 years on average, the Social Security claiming decision has gotten a lot more complicated. If you wait until the maximum age (currently 70) before you start collecting, you’re still expected to live another 15 years or more.
You might be comforted to learn there are some fairly reliable guidelines that could help you make your Social Security claiming decision. Some are rather unexpected, some are obvious and one might be downright surprising.
#1: You have a long life expectancy
This one goes without saying. While you never know when you’ll stay or when you’ll go, actuarial tables can offer you a clue (along with your own family history).
“In Social Security planning, life expectancy is a crucial factor,” says Lyle Solomon, Principal Attorney at Oak View Law Group in Rocklin, California. “Of course, no one can determine how long they might live, but according to the most recent numbers from the Centers for Disease Control and Prevention, the average American who lives to be 65 can expect to live for another 19 years.”
It’s well known that, by starting Social Security later, the cumulative dollars of that higher benefit will eventually catch up to and surpass the smaller benefit earned from claiming Social Security earlier.
“If someone does not have a need for the income, and has a high life expectancy, it makes sense to wait until 70 and allow your benefit to grow,” says Jennifer Stein, Director of Client Engagement at Priebe Wealth in Minneapolis. “This growth is guaranteed unlike investing in the market. While everyone’s breakeven is different, for a lot of people the breakeven of receiving benefits at 70 is around the early to mid-80’s. A breakeven analysis can provide you with an accurate breakeven for your age, situation and benefit.”
#2: You don’t have enough saved for retirement
This may sound counter-intuitive, especially if you’ve read the reasons to start collecting Social Security as early as possible, but, once you think about it, it makes sense, but only if you have a long life expectancy.
“If you have little to no money saved and invested for retirement, you’ll need to maximize Social Security benefits for your cash flow later in life,” says Cory Bittner, Co-Founder and Chief Operating Officer at Falcon Wealth Advisors in Mission Woods, Missouri.
The basic idea here is to accept you’ll need to tighten the belt for a few years to avoid locking yourself into an unacceptable situation for the remainder of your life.
“It makes sense to wait if your earned income or investment income exceeds your lifestyle needs,” says Dr. Guy Baker, Founder of Wealth Teams Alliance in Irvine, California. “There is no point reducing the benefit just to have the income.”
#3: You are still working or have more than enough money saved for retirement
This one makes a little more sense, and for multiple reasons, too. For one thing, if you’ve got a spouse, waiting increases their benefits as well.
“If you collect Social Security at age 70, there is no penalty for any income you earn,” says Susan Dover, Founder of Social Security Resource Center in Philadelphia. “Spousal benefits are higher at age 70. If you really do not need the money at age 62, consider waiting until age 70 and collect the maximum benefits. You will also be able to pass along the maximum benefits to your spouse.”
Don’t underestimate the size of the enlarged benefit to you, either. This augmented base level also helps in terms of any future inflation-related boosts in the annual payout.
“If you don’t need the income from Social Security at age 62, then waiting until age 70 could increase your benefit by possibly 132%,” says Chuck Czajka, Founder of Macro Money Concepts in Stuart, Florida. “In addition, any cost-of-living adjustments would also apply, even if you don’t begin collecting until age 70.”
Keep in mind, too, that if you take Social Security while you’re still earning income from a job, you may be subject to taxes. Baker says, “If the potential recipient has the ability to earn a significant income during their sixties, taking Social Security only increases taxes and reduces the ultimate benefit.”
“If you are still working, making over $18,960 and receiving Social Security, you will receive a reduction of $1 for every $2 of benefit up until your full retirement age,” says Stein. “It’s typically recommended that you wait to claim Social Security.”
#4: Your spouse didn’t work
If your spouse is relying on you to collect Social Security, then the survivor benefits are worth considering. Again, this doesn’t trump health issues or current income needs, but if you pass both those tests, this must be accounted for.
“Spouses who didn’t work for a living or didn’t earn sufficient credits to qualify for Social Security on their own can start receiving benefits at age 62 if their spouses did,” says Solomon. “If you accept your spousal benefit before achieving your Full Retirement Age (FRA), it will be lowered, just like if you seek benefits on your record. The maximum spousal benefit you can get is half of what your spouse is eligible for at your spouse’s FRA.”
Even if your spouse did work, the difference in wage-based eligibility and life expectancy can make survivor benefits a key factor in your decision.
“If your benefit is the higher of the two in the couple, then it’s likely your benefit will become the survivor benefit,” says Jeremy Keil, a retirement focused financial planner with Keil Financial Partners in New Berlin, Wisconsin. “If either one of you is expected to live past 12 years, then you would want to continue waiting as long as you can so that the survivor benefit is as high as possible for the widow(er). For example, for a 65-year-old non-smoking, average health couple, the odds that one of you will make it past 12 years from now is over 90%.”
#5: You like the 8% guaranteed investment return
Here’s something that just may surprise you: Social Security isn’t just a benefit, it’s an investment. Specifically, it’s like a savings bond that matures when you’re age 70. Sure, you can claim the benefit earlier, but the longer you wait, the more value that bond has to you.
This results in a very significant annual return that is far greater than a typical bond and approaches that of stocks. Moreover, this return is guaranteed.
“It wouldn’t make sense to claim Social Security at the earliest age (currently age 62) if you don’t need the income and/or are still working,” says Czajka. “If you don’t need the income, it would make more sense to defer collecting Social Security up until age 70. Doing this will allow your benefits to be higher, as there is an 8% benefit rollup each year you defer benefits, up to age 70.”
Another way to look at it is in terms of the permanent loss you’ll expose yourself to by claiming too early.
“If you claim Social Security before you reach FRA, your payments will be reduced by up to 25% to 30% compared to what you would have received if you had waited,” says Solomon. “This decrease will last indefinitely. Instead, if you wait until after your FRA to start receiving benefits, Social Security will give an 8% delayed retirement credit to your final monthly payout for each year you wait, up to age 70.”
Your Social Security claiming strategy should be a well thought out decision that incorporates all your other money matters. It shouldn’t be made in isolation. Likewise, it will impact other financial decisions you’ll be making.
“Having a comprehensive financial plan that accounts for taxes, estate planning and personal goals must be factored into Social Security claiming decisions,” says John Hagensen, Founder and Managing Director at Keystone Wealth Partners in Chandler, Arizona.
Because of its life-long significance, before you make your decision you should also investigate the reasons why it makes sense for you to take Social Security at the earliest possible age.