When it comes to a so-called “claiming strategy” for Social Security benefits, there’s no one-size-fits-all recommendation. The sheer number of variables involved makes this a complex decision. It seems to us that the answer to any question related to the timing of Social Security benefits always begins with, “It depends.”
In spite of the fact that full retirement age has been inching upward – rising gradually from 66 to 67 for those born after 1954 – the two Social Security constants so far have been age 62 and age 70. On the high end, age 70 is the point at which benefits stop growing, except for the annual cost of living adjustment, which means there’s no virtue in waiting until after age 70 t0 start receiving benefits. As for age 62, ever since 1961, that has been the youngest age at which non-disability payments from Social Security could begin.
Number of Beneficiaries Starting at Age 62 is Declining
Today about 24 percent of beneficiaries start receiving payments at age 62. (That’s far below a decade ago, when one-third of men and nearly 40 percent of women opted for the earliest-possible benefit.) Most of us know that taking early benefits locks in a lower payment for life. But are there scenarios where tapping those benefits at the earliest opportunity does make sense?
The answer, as noted above, is “It depends.” To explore some situations where the answer might be yes, let’s look at this recent article from US News in which reporters Rachel Hartman and Brian O’Connell tackle the question. They’ve listed several such scenarios, although we have to admit we’re puzzled by the last one and wonder whether O’Connell and Hartman got it wrong. Let’s dive in.
While Waiting Pays Off, Circumstances Can Favor Early SS Benefits
“Waiting to claim Social Security often pays off in the long run,” the article begins, “but there are also several reasons to start Social Security payments at the earliest possible age.” The authors do agree with our statement above that there’s no cookie-cutter formula for timing those benefits.
“There’s no perfect formula for deciding when to take Social Security,” Hartman and O’Connell write. “There are, however, plenty of good Social Security timing scenarios to choose from.” As we noted, you can begin as early as age 62, but your benefit will be reduced if you do. Full benefits kick in at your full retirement age, generally between age 66 and 67.
The reduction is considerable, the article notes. “If you take Social Security distributions at age 62, you’ll get 25 percent smaller payouts if your full retirement age is 66 and 30 percent smaller payouts if your full retirement age is 67,” Hartman and O’Connell explain. Still, despite that financial reality, starting Social Security payments at the earliest possible age might be the best choice in some circumstances. Ask yourself these questions.
“What If I Have Health Issues?”
This may be the first situation most of us consider when the topic of early benefits arises. If you have a health condition that may shorten your lifespan, the earliest possible start date can be the wise choice.
“In that scenario, it might make sense to take benefits at age 62,” Florida financial planner Chuck Czajka told US News. “Remember, benefits are paid for life and cease upon death.”
The one caveat regarding a serious health issue involves spousal benefits. If you are married, the article recommends, and your Social Security benefit is larger than your spouse’s, you may choose to delay Social Security in order to leave your spouse with a larger surviving spousal benefit. We’ll cover that below.
“What If I’m Done Working for Good?”
If you know at age 62 that, for whatever reason, you have no plans to work another day in your life, then early benefits might make sense. That’s because Social Security withholds money from your benefit if you claim early payments while still earning a paycheck.
“If you keep working and earn more than $22,320, for every $2 you earn over this amount, Social Security will withhold $1,” Hartman and O’Connell tell us. “If you decide not to work and have enough to cover your retirement expenses, you may decide to receive the benefit early.”
“What If I Need Cash to Cover My Expenses?”
“Before collecting benefits early,” says the US News article, “Social Security recipients should consider three key issues: everyday living expenses, current savings and long-term health.” In cases where income from other sources falls short, early Social Security payments might become a necessity.
“If your current everyday living expenses surpass your Social Security benefit amount, you may not have the luxury of waiting for a larger payout,” says Lindsey Crossmier, a financial writer with RetireGuide. “You may need that money now to live comfortably.”
However, before deciding on early benefits, consider other options. Working longer, either full-time or part-time, could help you bridge the gap. So could a reverse mortgage for those who qualify. A qualified financial planner can help you chart a course that may allow you to delay Social Security benefits even for a few years.
“What If I’m Facing a Financial Emergency?”
This ties in with the previous point – although in today’s turbulent economy, a crisis can hit at almost any time.
“If you have experienced a financial emergency such as a layoff and are at least age 62, it can make sense to take Social Security early,” the authors write. “You could also use the funds to launch your next phase of life.”
It’s also possible to repay Social Security if your fortunes change, effectively giving you a “do-over.” As Hartman and O’Connell write, “If you recoup some of that money, you can repay your Social Security benefit within the first year without penalty, allowing your future Social Security benefit to accumulate.”
“What If I Need to Get Out of Debt?”
Here’s another situation in which we encourage you to get some objective financial advice.
“If you have debt that needs to be repaid and you cannot increase your earnings or take money from savings, consider taking Social Security payments sooner,” say the authors. “That could help mitigate interest charges that might be piling up. Consolidating loans can also help simplify the repayment process.”
While that may be true, it seems to us like a drastic and permanent step, especially if your health is good. Locking in a lifetime of reduced payments means you’ll be handicapped for two or three decades of retirement. We urge you to look into other ways to clear away that debt.
“What If I Want to Maximize Spousal Benefits?”
We can’t quite figure out why this argument made the list of reasons to take early benefits. Maybe Hartman and O’Connell were trying to make the opposite point: spousal benefits are a reason to delay as long as possible, not a reason to pull the Social Security trigger early.
“If you’re married,” say the authors, “when to collect Social Security becomes a joint decision.” That’s especially true for couples in which one spouse has a considerably larger benefit than the other.
“If your spouse took extended time off work for child care or any other reason, their Social Security payouts will already be less than yours no matter what since they have contributed less over time. So, you should wait to collect and receive larger payouts,” says Mark Henry, wealth manager in Greenville, South Carolina.
Couples who both receive Social Security benefits get two payments each month and enjoy the combined income. But when the spouse – often the husband – with the larger benefit dies, the wife will lose her smaller benefit and continue receiving the husband’s larger benefit for the rest of her life. It’s imperative for couples to make certain their Social Security strategy takes this important fact into account, or else the surviving spouse will be forced to live on thousands of dollars less each year in Social Security income.
The Downside of Collecting Social Security at Age 62
“Most people take Social Security at age 62 even though they are giving up 30 percent of their future income,” the authors write. (Actually that statement is not quite true: age 66 is actually the most popular, by a few percentage points, with age 62 a close second.)
“If you’re still working at age 62 or you have other sources of income, it might make sense to wait until full retirement age or age 70 to take Social Security,” says Amy Colton, Texas-based wealth manager. “If there are investment accounts, annuities, pensions or a reverse mortgage that they can tap into, it might make sense to wait.”
Hartman and O’Connell make it clear that those who opt to take Social Security benefits at 62 will receive the lowest possible monthly payouts the federal government pays out.
But no one can predict our own longevity. For those who anticipate living past age 82 or 83, the benefit if waiting is clear. If that seems unlikely, you have a decision to make. Please contact us if we can be a referral source to get you the solid, unbiased advice you need.
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(originally reported at https://money.usnews.com)