Kiplinger’s recent article, “The Biggest Social Security Mistake You Can Make,” explains that the biggest Social Security mistake isn’t taking it too early.
Individuals can claim their Social Security retirement benefits as early as age 62 (and get a reduced benefit) or wait and receive a larger benefit. At 70, the maximum benefit is reached, which is about 75% greater than the early benefit at age 62. It’s not hard to do the math to find the break-even point or the age at which total Social Security income received from starting benefits at two different ages is the same.
However, the problem is that you’re looking at Social Security in a vacuum. The average retirement age in the U.S. is age 63, according to the U.S. Census Bureau. If you retire before 70 and delay taking your benefits, how are you going to make up for this lost income during those years? Well, you’ll probably spend down your savings at a faster rate, possibly eating a bigger hole in your principal.
Delaying Social Security makes most sense for those who are healthy, still working and looking to replace as much of their earned income as possible. In addition, it would be a greater survivor benefit to a spouse. Some people can also lower their taxes in retirement, by delaying Social Security and tapping their retirement accounts. That would reduce their required minimum distributions (RMDs) and their taxes. However, it’s rare when the amount in taxes you can save in your later years, outweighs the taxes you’ll pay beforehand. Hence, this strategy should be considered only with the help of a legal professional.
You should consider your entire financial picture. This is because each source of income has its advantages. For example, with your personal savings, you have more control and flexibility over your savings than Social Security. With your savings, if you need more or less income, you have the ability to make an adjustment. However, once you take Social Security, you can’t voluntarily adjust the size of your benefit. Other than a spousal or survivor benefit, you can’t name beneficiaries on your Social Security benefit or leave a legacy. With any investment account, you can pass it on to a spouse, other family members, friends or charities.
The objective is to best utilize the advantages of each income source, in a way that helps maximize your income to achieve your financial goals and maximize your flexibility. This is important if you encounter any bumps in the future. Rather than thinking you need to automatically take Social Security at age 62, full retirement age or age 70, look at how every asset, liability, and income source works together in a detailed financial plan. Consider what you can get from sources other than Social Security, including retirement savings, pensions and/or part-time work.
Reference: Kiplinger (June 4, 2018) “The Biggest Social Security Mistake You Can Make”