By now most readers of the AgingOptions blog know that taking Early Social Security at the earliest possible age – 62 for most baby boomers – is generally a bad idea. While it may be tempting to grab for the extra monthly check at the first opportunity, you’ll be leaving quite a lot of money on the table if you do.
Early Social Security “Blind Spots”
This article on the CNBC website makes that very point about early Social Security, but it also highlights something you need to be aware of as you plot your Social Security strategy: those “breakeven” calculators that many financial websites use can be misleading. The CNBC article says that most of us have “certain blind spots” than can cause us to make the wrong decision when it comes to signing up for early benefits, and the online calculators may not be all that helpful.
According to the CNBC report, Social Security is designed (in theory) so that regardless of when you start your benefits you’ll get the same amount of money throughout the rest of your lifetime. The term for this is “actuarial neutrality.” Starting with a reduced monthly benefit at age 62, unclaimed Social Security benefits grow (for those who wait) at about 8 percent per year, maxing out at age 70. That means anyone with a spreadsheet can calculate the point at which your total benefits if you wait until 66 or 70 exceed the amount you would have received had you started benefits at 62 – a point referred to as “breakeven.” According to CNBC, “breakeven” is “the point at which the amount you receive if you claim later equals the amount you would have received if you had started early.” The article says that breakeven age for most people approaching retirement today ranges between about 77 and 83.
Don’t Overlook These Considerations
Before you decide, based on an online calculator or your own spreadsheet, that taking early Social Security makes sense, it’s probably a good idea to get some expert advice, because you might be overlooking some important factors that ought to impact your decision – some “blind spots,” to use CNBC’s term. Here are a few:
- Cost-of-Living Adjustments: In some years, Social Security beneficiaries get no cost-of-living adjustments at all. This year the adjustment was two percent, a bit below the average increase most experts would predict, says CNBC. The problem is that if you add a cost-of-living adjustment to your calculator as a way of helping you decide whether early benefits are worth taking, you might get distorted results. If someone is doing the early Social Security calculation for you, this article advises having them leave out the cost-of-living adjustment entirely for a better apples-to-apples comparison.
- Investment Opportunity: Some beneficiaries claim benefits early expecting to invest that money, which makes it hard to calculate the relative benefits of waiting. Based on our observation of the retirement landscape, however, it would seem that most people who take early Social Security do so because they need the money. Any plans to invest those “extra” funds can quickly evaporate. If you think you can play the market with your early Social Security money and come out ahead, you may be deluding yourself.
- The “Security” in Social Security: Your breakeven calculator might seem to convince you that early Social Security is wise – but in today’s volatile market, you shouldn’t overlook the fact that you “earn” a guaranteed eight percent or so every year by waiting to draw benefits. Few safe investments come anywhere close.
- The Benefit for your Spouse: This is an important factor that many articles on early Social Security seem to overlook. “If you’re married,” says CNBC, “your spouse should be a big consideration in your claiming decision. That is because starting benefits earlier can also reduce your spouse’s benefits if they plan to claim on your work record.” Once you pass away, if you are the larger earner, your spouse in most cases becomes entitled to your benefit. Claiming early Social Security not only locks in your benefit amount for the rest of your life (plus cost-of-living adjustments), it also does the same for your spouse.
No Secret, Just Common Sense
Deciding when to claim Social Security benefits is a big decision for the majority of retirees, and there are hundreds of articles claiming to offer “the secret to maximizing Social Security,” but in our view there’s really no secret – just common sense. As with most aspects of retirement, the key is to build a plan based on good, solid advice, not gimmicks and schemes. If you’ll contact us here at AgingOptions, we’ll gladly meet with you and talk through your options regarding Social Security, but we’ll also urge you as we urge all our radio listeners and blog readers to take a much more holistic approach to planning for retirement.
Financial planning, including Social Security, is extremely important, but it’s only part of the retirement picture. You’ll also want to consider the proper legal framework that will protect your interests. You’ll need to take your housing plans into consideration, not just for today but for your future as well. What about medical insurance – is your plan adequate for your changing needs and those of your spouse? Finally, you should make certain your family understands and will support your wishes as you age. These five facets of retirement – finance, legal, housing, medical and family – are woven together into a retirement plan we call a LifePlan, the most comprehensive retirement strategy we know of. Your LifePlan provides the blueprint to build the retirement of your dreams.
We encourage you to find out more, without cost or obligation, by joining Rajiv Nagaich at a free LifePlanning Seminar at a location and time that’s convenient for you. You’ll find a complete calendar of currently scheduled seminars when you visit our Live Events page where you can register online for the seminar of your choice. We’ll look forward to meeting you!
(originally reported at www.cnbc.com)