Delaying Social Security Benefits Now Make Less Sense
While financial advisors always have told us to wait until age 70 to collect Social Security benefits, the changing landscape of Social Security should have us rethinking this.
Whenever we’ve done the math on the comparative benefits between taking Social Security earlier or later, later has always won out, provided that we at least expect to live long enough to have this calculation end up in their favor if they do wait.
This calculation is very much dependent upon life expectancy, and it’s always been the case that those who may have a lower life expectancy than average should take their Social Security payment earlier rather than later.
We can start collecting benefits as early as age 62, and delay them until up to age 70. We can start collecting Social Security even prior to retirement, but this brings in tax considerations, because this income is all at the margin. When we retire, our base income goes away and there are generally some notable tax advantages to delaying this at least until retirement, which do need to be accounted for.
If we were 62 and we knew that we only had 5 more years to live, postponing this would always be a bad idea because we would be getting nothing by waiting, although we still want to consider widow and widower benefits and we might still want to pass on this anyway. We rarely know when we will die though, but we often do have a good idea, in cases where one’s present health does not make it very likely that we will get to 82.
Making Up for Lost Money
The next thing to account for is what will be considered our normal retirement age, where we may collect full benefits. Among those who are approaching retirement age, people who were born before 1960, it is between 66 and 67, and those born in 1960 or later have theirs set at 67.
The calculation as far as the benefits we will receive at a given age isn’t that complicated at all. For every year that we take our benefits early, it costs us 6%. For each year that we delay collecting them, we gain 8% per year. If our normal retirement age is 67 for instance, and we wait until 70, we gain 24% per year from 70 onward. We have to make up for the 3 years we gave up to start coming out ahead, and this means that we’ll have to live until 82 to do this.
If our retirement age is 66, we get 32% more, but we now have to make up for 4 years of not receiving benefits, so that means that the break-even year is also 82. 82 is the magic number here, and while advisors will just about always tell you to wait, whether this is good advice or not is going to depend on the chances of your getting to 82.
82 is a pretty big number though, but when we account for the upcoming changes to how benefits will be paid out here, it gets even bigger, perhaps too big.
With that said, we all know that the expectation is that Social Security benefits will be declining, as the current rate of benefits are simply not sustainable over time. The Social Security Administration is telling people right now that in 2034, benefits will be reduced to 77%.
This Reduction in Payments Matters Quite a Bit
That’s 15 years off, but close enough to affect those who are coming up to the age where they will be able to make the decision about whether they should wait or not. It’s not that benefits will just drop all at once though, and the expectation was that the government would come up with a schedule to bring this reduction in over time. Given the financial state of Social Security, we can just about count on this happening, and this has to be accounted for.
It’s not that Social Security will be going broke at any point in the future, provided that they still collect taxes for this from people, but the problem is that the taxes alone are not enough anymore, even though they have been enough up until now. In 2020, that all changes, and the program will begin running a deficit, which will get bigger and bigger each year until the fund that makes up for this is emptied.
As we move forward, this 13% in 15 years that is projected will very likely be implemented gradually, and this is going to add to the amount of time that we need to collect it if we delay doing so. This alone will extend the break-even year by 25%, and the 12 years we need to break even now becomes 16, as in age 86. That’s just too far out to want to gamble on.
The potential bad news is that the government may raise the age of eligibility to age 70, and there’s already talk of doing this by the Trump administration. This will make things very simple of course, as we just won’t have a choice anymore and the only thing to do then is to just collect whatever they send us and not even think about it beyond that, because there is no need to.
For now though, if we do have an opportunity to decide whether to take our benefits at a certain age or not, the pendulum has swung over to the take it now side now. Once the reductions start, it may even make sense to take a reduced amount between 62 and 67, because the calculation occurs over a similar number of years, and if the payout over these years is reduced, this will also impact the decision and have us wanting to get paid sooner.
Given that Social Security is about to start losing money every year, and with all the uncertainty surrounding it, it may indeed be wiser to take the money and run.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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