Today I am very excited to bring you a guest post from fellow Fee-Only Financial Planner Richard Feight of East Lansing and Grand Rapids, Michigan. Rich is the founder of IAM Financial where he specializes in helping small business owners translate a lifetime of work into a happy and fulfilling retirement. Enjoy!
5 Reasons Why You Should Delay Taking Social Security
April is National #SocialSecurity Month! As a result I thought it would be a good idea to share with you five reasons why it may be beneficial for someone to delay taking social security.
More often than not when someone has worked for thirty-five or forty years and paid into social security every single paycheck, they want to collect as soon as the office opens on their 62 birthday. They MUST get their money back!
Maybe it’s an inherent lack of trust in our government to do the right thing with our money. Maybe it’s just a fear of someone else holding our money and we want it back. Either way, it’s usually the wrong move to collect social security at age 62.
This article is going to walk you through 5 reasons to delay taking social security. But before we start, a couple housekeeping items:
Know Your Benefit
It’s important to know your benefit before making any decisions about when to take it. If you don’t know what your social security benefit is, you need to head on over to the mySocialSecurity website at ssa.gov/myaccount and get your most recent statement. At this site you can sign-in or create an account if you haven’t already done so. I mean, it really makes no sense to decide to take social security when you don’t even know what you’ll get.
Verify Your Benefit
Once you have your benefit figures, it’s not a bad idea to verify them. Look at your earnings history under the earnings record tab and see if there are any glaring errors. If there are, call the Social Security Administration right away at 800-772-1213.
Once you’ve verified your earnings, and have a current benefit, you can make an informed decision as to whether or not to collect at age 62 or later. Five reasons you might collect later include:
- You get MORE money for waiting.
That’s right, for every year you wait to collect social security, you get an 8 credit increase in your benefit. That’s a fancy way of saying your benefit increases 8% every year you wait. Let’s put the rubber to the road here and show you some hypothetical figures.
Joe can collect $1,939/mo at age 62. He’s pretty excited about this. That’ll help him pay off his house quicker. So he decides as soon as he turns age 62, he’s going to collect. Wait one minute Mr. Joe. Not so fast.
Red flag number one is that Joe has debt. If Joe has debt, chances are, he’s not close to retiring. If Joe waits to collect social security until he’s 67, he’ll collect $2,838. That’s 46% more over a 5 year period. Plus, IF he still has a mortgage, he cannot only pay that, but he can also have a little left to live off of.
I’d rather Joe wait until age 70 when he can collect $3,562/mo, which is an 83% return over an 8 year period. To look at it another way, if you don’t know for certain that you are going to get 83% return in your investments over the next 8 years, you may be better off using investments for income, and delaying social security.
- Your spouse gets more money if you die.
Okay, so this is sort of a “Debbie downer” to think about. But most married couples never consider what their household benefit would be if one of them dies. They see their total benefit of $3,601 at age 62. See chart below. What they don’t see is that their survivor benefit if someone dies at age 70 is almost the same as their collective benefit if someone dies early. These numbers came directly from the social security statements some of my clients received from the Social Security Administration:
- You lower your required minimum distributions by drawing down your IRA balance.
So there is sort of a phantom benefit of delaying collecting social security. Most of my retirees dread taking their required minimum distributions at age 70 ½. If you live off your retirement accounts from age 62 until you are age 70 instead of collecting social security, you actually draw down your Individual Retirement Accounts. This, in turn, makes the RMDs lower at age 70, meaning you may have more control over your income at age 70.
For example, if you have an IRA worth $800,000, and you are withdrawing $3,601/mo to make up for your missed social security income, your annual income would be $43,212. Over 8 years, all things being equal, you would’ve withdrawn $345,696 and have $454,304 left in your IRA. Your RMD on $454,304 is $16,580 versus $29,197 if you had $800,000 left in your IRA.
Of course, there’s growth and inflation to consider, so these figures are over-simplistic. But you get the point. Your RMD is lower and you have a social security guaranteed income at an age when you don’t want to be worrying about market fluctuations.
- You shift your risk from market/investment risk to government risk
It’s been said that the Chinese symbol for opportunity also contains the word “danger”. This benefit of waiting to collect social security may be sort of like that. In general, social security has been more reliable than market returns are for an income. This should continue, if you believe that Congress will do the right thing and make sure social security is funded. The market goes up. The market goes down. So far, social security has not gone down. But there is something to be said for shifting some of your retirement risk from market risk, to governmental risk during a period in life when you probably don’t want to be worried about the market as much.
- Your financial plan shows a higher likelihood of success
Ultimately, the best reason to delay collecting social security, is because your financial plan has a better likelihood of success if you do. Any NAPFA Registered Financial Advisor, like Lauren, will be able to show you that your financial plan may be better off when you delay taking social security.
There may be circumstances where one person should delay until age 70, and the other partner can collect earlier. A good plan will show you the difference, and let you make an informed decision.
When is it best to collect early?
Sometimes it is best to collect early. These situations usually revolve around health issues where your life expectancy is short. Sometimes you already have a sufficient income from other sources like pensions and social security income is a smaller part of the retirement equation.
The best thing you can do is ask an advisor. Get all the facts and make an informed decision. For more information about social security, check out ssa.gov. For more information about your specific situation, ask an advisor like Lauren.
About the Author
Rich Feight, CFP®, EA is a fee-only Certified Financial Planner® and Professional NAPFA-Registered Financial Advisor at IAM Financial in East Lansing and Grand Rapids Michigan. Rich has 20 years of experience helping self-employed business owners and professionals organize their finances so they can retire on time. You can read more of Rich’s thoughts on retirement at www.thinkingbeyondnumbers.com.