You’ve paid into social security for your entire working life, and you’re ready to reap what you’ve sewn. By claiming your benefits early, you can enjoy greater income now and and let your investments grow untouched for a few years more…… Right?!
Year after year, millions of people choose this fast and furious approach to their social security benefits. As the Social Security Administration notes, 65.1 million people received benefits from social security programs in 2015, 5.4 million of which were new recipients.
Full benefits begin at the age of 65 or 66 for individuals born between 1943 and 1954, although you can begin collecting as early as 62 if you’re willing to accept around 30 percent less. But despite the lower payout, as many as 4 in 10 future retirees over the age of 50 claim they’ll tap into social security as soon as they can.
Getting more money now is the American way, but is it the best idea? At the end of the day, it all depends on how long you’ll live – the one life detail that no one actually knows.
When you accept social security benefits early, you’re accepting a lower payout for the duration of your benefits. Is this a good deal? If you live only a few years, it might be your best decision yet. But if you live until you’re 90, you might regret it.
How You Could Leave Your Spouse Behind
When deciding the timing of their SS benefits, many retirees attempt a break-even analysis comparing the length of payments to the amount of payments to determine a break-even age. I hear this as a reason to collect SS early all the time. “I collected early at 62 because I would have to live to 83 to break even,” my clients will say.
The problem with “break even math” is that it forgets spousal beneficiaries. The simplest explanation of this rule is this: the biggest Social Security check in the family is a 100% ‘joint-and-survivor’ benefit, meaning that large check keeps paying as long as either spouse is living.
A lot of our male clients who take social security base their decision on break even math. Without realizing it, they could be saddling their spouse with lower Social Security payments for life. Sure, these older male clients might die at 83. But if their wife lives to 96, they have just burdened her with decades of lower benefits.
If you’re picturing grandmas struggling to get by on tightening benefits in old age, you’re right to worry. As the Social Security Administration notes, 55 percent of adult social security benefits were women in 2015. Like it not, women live longer – a lot longer. A man reaching 65 today can expect to live to age 84.3, but a woman has a life expectancy of 86.6.
Also, those are just averages. “About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95,” notes the Social Security Administration.
Don’t Bet on the Market
Another reason retirees claim their benefits early? They assume their retirement portfolio will beat the returns of deferring social security until they receive full benefits. By taking social security early, they’ll argue, they’re letting their retirement portfolio beef up for greater returns down the line.
But, what if your portfolio doesn’t grow? What if your investments flounder – or worse – take a huge hit? In this case, you’d have to endure those lower social security payments for life without the investments gains you’d hoped for.
As you approach the age where claiming social security benefits is feasible, try not to bet the farm on “maybes” or wishful thinking. Remember, a guaranteed increase to your retirement income is a whole lot better than rolling the dice and hoping you’ll come out ahead.
Instead of taking chances, consider liquidating some cash/bond equivalents from your portfolio to defer Social Security benefits until you can claim the full amount.
Final Thoughts
Wishing to tap into potential income sources early is totally normal, and it’s true there are certain situations where claiming social security early is the smart thing to do. But, I would caution you to think long and hard before you commit to a payout for the rest of your life.
Just because the extra funds would lessen your load now doesn’t mean the “future you” will be better off. As you plot out your retirement, make sure to think beyond today to five, ten, or twenty years from now. How might your life be different?
While nobody can predict the future, it’s safe to assume the “future you” would choose a higher payout if she could. By denying her that choice, you could be making a grave mistake with consequences that last a lifetime.
