As we detailed in the last blog (Understanding Your Social Security Options), although you can start receiving your Social Security benefits at age 62, it really pays to wait.
The longer you wait to take your benefits (between the ages of 62 and 70), the higher your monthly benefits are than if you took your Social Security early.
So, what if I wait?
To put this into perspective, here’s an example of what those different benefit amounts would look like depending on when you claim:
-Benefit at 62: $750
-Benefit at 66: $1,000
-Benefit at 70: $1,320
As you can see, by delaying your benefits for 8 years until 70, you get an extra $570 per month, or 76% more than you would get at 62.
One More Benefit To Waiting
And even better? All these amounts are adjusted for inflation, also known as your Cost of Living Adjustment. Which means that your larger benefit will get you a larger Cost of Living Adjustment, increasing your benefit even more. Since 2000, the average Cost of Living Adjustment has been 2.16%.
Know Your Breakeven Age
One thing to consider when you are deciding on when to take your benefits is something called your breakeven age. The breakeven age simply refers to when you would receive equal benefits using different ages to claim your benefits.
Let’s look at an example from Investopedia of a woman named Susan to help clarify this.
She is debating between taking her benefits at age 62, and at age 65.
If she were to take it at age 62, her benefits would be $800 a month. So for the first three years, she received $28,800.
Now, she wants to see what it would look like if she waited until 65 to receive her benefits, at which point (since she waited), her benefits would be $1,000 each month.
So we know that if she took her benefits at 62, she would have accumulated $28,800. And if she started at age 65, she would naturally have accumulated $0 at age 65 (since she hasn’t started).
Now the question is: At what age does waiting until 65 accumulate more lifetime benefits than taking your benefits at age 62? That is the “breakeven age” that we are trying to find out.
In Susan’s case, using these two benefit election ages, her breakeven age is 77. After age 77, Susan will accumulate more money by waiting until age 65 than by taking it earlier.
The one great variable in all of this? Knowing exactly how long you will live!
Generally speaking: If someone were to take their benefits early, and then passes away before their late 70’s, then they would have accumulated more social security benefits than if they waited.
However, if that person were to live into their 80’s and potentially their 90’s, then they would have accumulated more money by delaying their social security benefits.
Determining your breakeven age can help you determine whether you would prefer to delay your benefits or receive them early.
One Common Question To Waiting: Will My Social Security Benefits Still Be There If I Wait?
A question that I hear often, and for good reason, is whether you should take your benefits early, just so that you can get some benefits before Social Security gets in even worse financial shape.
To answer that question, I’ve included an extended excerpt from my book The Retirement Tax Bomb, which offers more background on Social Security and Medicare, as well as my analysis of the situation:
“Both Social Security and Medicare are currently paid for by a combination of two sources: Payroll taxes (paid by workers), and Trust Funds.
Social Security and Medicare have their own separate Trust Fund that they use to pay for their programs, in addition to what they receive from payroll taxes.
Right now, we depend on payroll taxes to pay for most of these programs. And we use the trust funds to pay for the remaining balance.
But we have a huge problem: Since we’ve been using the money in the trust fund for many years, we’re actually depleting the amount in each fund. And soon – within the next 10-15 years, both trust funds will be completely depleted.
This is a huge problem – as I just mentioned, payroll taxes can’t currently fund both programs. And it’s only going to get worse, since we don’t have enough workers paying into the system.
By the time that each trust fund runs out, payroll taxes will only account for 75% of Social Security benefits and 90% of Medicare benefits.
So what will the government do to address this problem? They have two main options, in my mind:
One, they can drastically cut benefits.
Two, they can drastically increase taxes.
I think the second is far more likely, and I’ll explain why….
The main thing you need to ask yourself right now is:
Where will our government get the money to make up the difference between the promised benefits and the expected tax shortfall to pay for those benefits?
When it comes to Social Security and Medicare, there have been a number of potential solutions. The five most common ones are:
- Push back the age for full benefits
- Lower the inflation increases (for Social Security)
- Tax Social Security benefits (even more)
- Decrease benefit amounts/coverages
- Raise the contribution amounts (ie, taxes) of working Americans
These solutions might seem like common sense ideas that rational people can compromise, negotiate and eventually agree on. Right?
Hah! Unfortunately, as I’m sure you’re aware, our political system doesn’t exactly work like that.
For instance, let’s look at Paul Ryan, a former Congressman from Wisconsin. Ryan is known as a fiscal conservative, who is deeply concerned about the debt, deficits, and the growing benefits of Social Security, Medicare, and our country’s future inability to fund them.
So in 2011 he proposed a budget that would make major changes to the system in an effort to stabilize and sustain Social Security and Medicare. In particular, he suggested pushing back the age you are entitled to benefits, as well as limiting the costs of these programs.
It was a very detailed plan, which we don’t have the time to detail here. But the essence of it is that it did represent a cut in some benefits for these programs.
So what happened next? Was there a good faith argument about the merits of his proposed budget?
Nope! Not even close.
Instead of doing that, his opponents made an advertisement showing him push an elderly lady off of a cliff. Yes, you read that correctly.
Paul Ryan’s proposed changes to Social Security and Medicare were portrayed as throwing your sweet ole grandma off to her untimely death.
Needless to say, Paul’s changes were not adopted, and nothing in terms of these programs or our country’s fiscal crisis was changed.
What’s the point of this story?
That anyone who wants to change (or more specifically, cut) Social Security or Medicare benefits is in for a rude awakening.
Politicians want to get re-elected, and they know that one of the largest, most vocal, and most likely to vote voting blocs are people over the age of 50. And those people don’t want to see their Social Security or Medicare benefits lowered.
Which is why I’ve said throughout this book that if our country is going to make changes to Social Security or Medicare, tax increases are far more likely than benefit cuts.”
That’s how I see the situation from where I’m sitting. So for me, and the clients I work with, I generally don’t recommend taking your benefits early simply because you think benefits will evaporate a few years from now.
I think the more likely change is for tax rates to rise, as well as younger citizens having some of their benefit calculations changed, while keeping things status-quo for people who are already or near receiving their benefits.
As you know, though: No one has a crystal ball, this is just my perspective, and I can’t predict the future.
Overall, there are some strong benefits to waiting until either your full retirement age or beyond to accumulate more lifetime Social Security benefits. In addition to that, you also won’t have to worry about your earnings being too high while taking Social Security.
Key Takeaways:
- Like Many Things In Life, It Pays To Wait To Claim Your Social Security Benefits. They Grow 8% Per Year That You Delay Taking Them.
- Social Security Does Offer A Cost Of Living Adjustment (COLA), That They Determine, So Your Benefits Do Increase In Dollar Amount Per Year (But It Is Not Guaranteed To Keep Up With Inflation).
- Consider When Your Breakeven Age Is (Ie, When Will You Earn More Total Benefits By Waiting, Than You Would By Taking Your Benefits Earlier)
- Social Security May Undergo Changes In The Future. While No One (Including Yours Truly) Has A Crystal Ball, I Believe Tax Hikes Are More Likely Than Benefit Reductions.