Social Security Benefits: To Take Early or Not to Take Early, That is the Question …

The Baby-Boomer Generation is entering into their 60’s at a rate of almost 8,000 a day, according to AARP.  As they do, they will face one of the most important financial decisions about their retirement, which is when to claim their Social Security benefits. http://www.ssa.gov/pubs/EN-05-10147.pdf

Approximately 50% of people rush to file for benefits at 62 as soon as they are eligible; usually because they need the money, are fearful of a short life span or thinking that Social Security might collapse.  But what about everyone else?  Most experts will advise you that in order to get the biggest bang for your buck, you should wait as long as possible before applying for Social Security benefits.

That concept makes perfect sense because, by waiting until your full retirement age, (which depends on your birthdate and is currently 66), if not longer, you stand a good chance of maximizing your lifetime benefits.  If you claim your benefits early, at age 62, you’ll receive 25% less than you would if you waited until full retirement age when you would receive 100% of your benefits.  Additionally there is actually an incentive to wait even longer, as the Social Security Administration bumps benefit payments up 8% for each year that you postpone filing a claim after you reach your full retirement age.  Therefore if you wait until age 70, when filing is mandatory, you will receive approximately 132% of your benefits.

So, this decision seems like a no-brainer until you hear someone make the argument that the sooner you start collecting the more checks you will receive.  The debate then becomes, do you want more checks at lower amounts that start when you’re 62, or fewer checks that are larger and come later in your life?  If you could predict when you are going to die, the debate would end and you’d know the best choice.  But, since none of us know when we will die, financial planners prefer to calculate your break-even point.  This analysis calculates how much you’re likely to receive in total lifetime benefits based upon when you start receiving them and how long you expect to live.

This analysis is really a waste of time and unnecessary because the Social Security Administration has designed its’ benefit formula to, on average, make sure each individual receives the same amount in lifetime benefits regardless of when they elect to start receiving benefit payments.  This doesn’t mean that the decision of when to take your benefits doesn’t matter.  If you’re lucky enough to live a long life, then the decision to wait to collect your Social Security benefits will definitely result in you receiving more cumulative lifetime benefits.

If you are married and one of you has contributed much less to Social Security over the years, the one of you that has contributed more should try and wait longer to claim benefits, at least until full retirement age.  Then if the higher earning spouse dies first, the surviving spouse can claim the deceased spouse’s full benefits.  In most cases it pays for the wife to start collecting early at 62 and for the husband to wait.  This is because statistics show that the husbands are likely to die first, and when that happens, the widow can collect based on his, typically higher, benefits.

–Scott Goldstein, CGMA, CPA, PARTNER