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What is the Best Age to Begin Taking Your Social Security

Last update on: Jun 18 2020
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What is the best age to begin taking your Social Security benefits? The answer might be changing.

We discussed this conundrum that faces those approaching retirement in both our past visits and in my book, The New Rules of Retirement. The general conclusion is that the vast majority of retirees who begin taking their benefits before normal retirement age probably have made the right decision.

As with everything else about retirement, things are changing so much that the right decision for future retirees might be a different one.

Most people know that the earlier you begin Social Security benefits, the lower the payment will be. The normal retirement age at which full payment is received used to be 65 for everyone. Now, normal retirement age is on a sliding scale depending on the year of birth. For those born in 1937 or earlier it is 65. For those born in 1960 and later it is 67. Those born in between have variable normal retirement ages. For example, someone born in 1942 has a normal retirement age of 65 years and 10 months.

Begin benefits before normal retirement age, and you receive a reduced monthly benefit. The amount the benefit is reduced depends on how long before normal retirement age it begins. You can begin taking benefits as early as 62. Starting the benefits at age 62 results in a monthly benefit equal to about 75% of the normal retirement benefit.

But delaying receipt of benefits increases the monthly benefit. Delay benefits past normal retirement age, and the benefit increases by 6% to 8% per year.

The key is that the increase and decrease rates are set so that anyone who lives to Life Expectancy receives the same lifetime payouts regardless of the age benefits begin. That makes the normal life expectancy the “breakeven point.” Live beyond that point and you will benefit by waiting to receive benefits. Your lifetime benefits will exceed what you would receive by starting at age 62.

But the increase and decrease rates were set in 1983, the last time Social Security was reformed, using life expectancy tables available at the time. Life expectancies have increased considerably since then. About half of men currently age 65 will live past age 85.

Another factor is that the annual cost of living increases also increase the initial benefit for those who delay benefits. If you actually wait until age 70 to begin benefits, you should receive a higher benefit than the one estimated when you were age 62, because of the cost of living factor.

About two thirds of beneficiaries begin their benefits early, and for many years that made a lot of sense. But the change in life expectancy is a reason many should at least consider delaying benefits. If you have no reason to believe your life expectancy will be below average, the delay might make sense. Since half of your age group will live beyond life expectancy, and that life expectancy is higher than what was assumed in 1983, most people will receive a higher lifetime benefit by waiting.

Another reason to consider delaying benefits is your spouse. If you were the higher income earner, your spouse’s benefits after your demise likely will be based on your benefits. Delay your benefits, and your spouse’s benefits will be based on the higher benefits you received. But take benefits early, and your spouse’s current and survivor benefits will be reduced. If you don’t need the money, delaying benefits is an easy way to increase your spouse’s lifetime security. Many advisors view delayed Social Security benefits as a very low-cost form of life insurance. Your spouse receives a higher benefit that is indexed for inflation and guaranteed for life, no matter how long that lasts. For the cost of foregoing Social Security benefits for a few years that can be a good deal if you do not need the money early.

There also can be tax benefits to using retirement accounts early while waiting to begin Social Security benefits. In the past we have discussed how required minimum distributions from qualified retirement accounts can greatly accelerated as one gets old than the late 70s. In time, these taxable distributions greatly exceed spending needs. This increases lifetime taxes and reduces the amounts available for heirs to inherit.

When qualified retirement accounts such as IRAs exceed spending needs, we have learned that it can make sense to empty an IRA early. Spend down those qualified accounts and let the taxable accounts compound. The gains you realize from selling taxable accounts later will be taxed at the long-term capital gains rate, not the ordinary income rate that faces qualified account distributions.

That is another good reason to consider delaying Social Security benefits. It might force you to spend some money from the qualified retirement plan, reducing future required minimum distributions. It might also make it less likely that high required distributions from a qualified plan will trigger income taxes on Social Security benefits.

Many Baby Boomers are likely to work past normal retirement age and certainly past age 62. A number of them will try retirement and, for lack of either money or things to do, they will return to work. If they begin taking Social Security benefits early, returning to work could cause the benefits to be reduced. Working will increase their benefits later, but it might not be enough to make up for the benefit reductions early. Working also could trigger income taxes on the benefits that are received. But at age 70 and after, Social Security benefits are not reduced regardless of the amount of earned income.

Delaying Social Security benefits is not for everyone.

Some people simply need the income as soon as they are eligible. They left their employment and are unable or unwilling to seek other work. They also do not have enough savings to wait for benefits.

Another reason not to delay benefits is if there are health or other reasons to doubt a person will reach the breakeven point of normal life expectancy. If that is the case, there is no reason to delay benefits except perhaps to increase benefits for a surviving spouse.

Some people who do not need the benefits still want to begin them early. Their reasoning is that they can invest the benefits. They believe the return they earn will be high enough to offset the higher benefits they would receive from waiting.

They might be right. But be sure to consider all the factors. The benefit at age 70 can be twice the age 62 benefit, after considering the age adjustment and inflation increases. In addition, that higher benefit will continue for life and will increase with inflation. There also will be a benefit for a surviving spouse. It will take some good returns to equal that package.

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