Lately it feels as if a lot of my conversations are about whether or not to take Social Security now. I say “now” because the conversations have ranged from those who are just turning 62 to those who are still working and reaching Social Security’s current Full Retirement Age of 66. The concerns of not taking it “now” is the same for all of them. First and foremost, what if I die and all of that benefit is lost? Second, what if the rules change and my benefits aren’t as much?
These are legitimate concerns. However, there are concerns on the flip side of this coin as well: If you begin collecting your social security benefits at 62, there is a loss of an eight percent per year increase on your income benefit, risk of less income for you or your surviving spouse if one of you dies, taxes, penalties and more taxes, and perhaps the biggest unknown to many—the overall effect on your retirement plan.
According to the Social Security Administration, over 34 percent of people file at age 62 and over 57 percent file prior to age 66. Then, another 18 plus percent fill at age 66. It is the popular thing to do, but is it the best thing to do? The short answer is “it depends.”
For most people that are still working or may work during their 60’s, not delaying Social Security as long as they can is usually a costly mistake. With an eight percent increase every year you wait and added taxes and possibly penalties, it doesn’t take long to hit that break-even age. Take a guy who turns 62 on January 1st, reaches Full Retirement Age at 66, but works until age 70:
Monthly Benefit | Filing Age | Tax Rate | Penalty | COLA | Break-even age |
$2,000 | 62 vs. 66 | 24% & 22% | Yes | 1.5% | Age 73 |
$2,000 | 66 vs. 70 | 24% & 22% | No | 1.5% | Age 80 |
$2,000 | 62 vs. 70 | 24% & 22% | Yes | 1.5% | Age 78 |
And this is in just an average tax bracket…. The higher the tax rate is, the lower your break-even age to wait will be.
What I have learned is that simply seeing these numbers is not usually enough to change someone’s mind. As we get older, we have more friends and family members that pass away, and the clock seems to tick a little quicker than it used to. We question whether or not we can even make it to age eighty. So, what if you could have your cake and eat it too?
There are ways to get the best of both worlds. Take your Social Security now, protect your spouse’s lost income for filing now, hedge that 8 percent per year increase, and in some cases, even lower your taxes. The key to all of this is not simply filing and forgetting. It takes filing and planning.
We have used the filing “now” strategy as a means to increase retirement income, protect families for morbidity and mortality, hedge the ticking tax bomb at age 70, and even create a family foundation where someone’s charitable legacy will live on for generations. Your Social Security may be the windfall you have been earning your entire adult life. After all, it may be your last windfall to do the things you know you need to do or have always wanted to do. Don’t let it slip through your fingers.