When I turned 62, I celebrated by filing the paperwork to start receiving my Social Security benefits.
This goes against the advice offered by the vast majority of professional advisers. Almost universally, financial advisers recommend delaying your benefits for as long as you can.
Yet I have analyzed the numbers and pondered the non-financial aspects of this decision repeatedly over the past several years, and I have always arrived at the same conclusion: Collecting my benefits at age 62 is the best choice for me.
And while everyone’s scenario is different, in most cases if you are no longer working or working and earning less than $16,000 a year, collecting Social Security at 62 is probably your best choice.
I’ll explain my rationale in a moment, but first, here are a few important caveats:
- I am not a professional financial adviser, and Retire Fabulously! is not a financial planning website. It’s a retirement lifestyle website. And it’s these lifestyle factors that contributed heavily to my decision to begin collecting my benefits sooner rather than later. You should consult a professional financial adviser if you have questions about your specific circumstances.
- Your situation is unique and different from mine. The decision of when to begin taking Social Security depends upon your personal circumstances. If you are married, your spouse’s age relative to yours and the difference in the amount of benefits you will each receive factor into the equation. There is no one-size-fits-all answer.
- If you are still working, don’t quit just to begin taking Social Security. As long as working is still sufficiently agreeable for you, keep working. There are many other factors that contribute to the decision of when to stop working that are beyond the scope of this article.
Now, let’s look at the numbers. As you know, the annual statement you receive from Social Security provides you with three numbers: the amount you will receive at age 62, at Full Retirement Age (FRA), and at 70. You can find your estimated benefit amounts at any time on Social Security’s website.
Many financial advisers recommend waiting as long as possible so that you will receive a higher amount each month. They say you should at least wait until Full Retirement Age, and most recommend waiting until 70 if at all possible.
It’s true that you will receive a larger monthly check the longer you wait. Your monthly check will be about 8% less for each year you begin taking your benefits before you reach FRA and, conversely, about 8% larger for each year you defer.
But what they don’t mention is the opportunity cost of the money you aren’t receiving during those years in which you are deferring payments. If your Full Retirement Age is 66 ½ and you begin taking Social Security at 62, you will already have received 54 payments by the time you reach FRA. The break-even point, that is, the point at which the total of all the larger payments you received starting at 66 ½ first exceeds the total of the smaller payments you received starting at 62, is about 80. (The actual break-even point will vary slightly based on a number of factors, such as the Cost of Living Adjustments that will occur each year.)
In other words, if you begin taking Social Security at 62 and you die before reaching 80, you will have received more money from Social Security in total than you would have if you waited until Full Retirement Age. Similarly, if you wait until age 70 to receive an even larger monthly check, it will take around ten years for the total amount of money you receive to catch up.
Even if you live beyond 80, you will still come out ahead if receiving a Social Security check enables you to withdraw less money from your investments over those years.
But there’s more to this decision than just analyzing the numbers. Retirement is not just a math problem. Here are five reasons why you could easily be better off by starting your Social Security payments at 62 or as soon as you stop working.
1. You will probably want to spend more money during your earlier retirement years.
I often say that retirement consists of three phases: your go-go years, your slow-go years, and your no-go years.
During your go-go years, you are still healthy enough to travel and engage in other active pursuits. These are the years in which you want to be able to spend some of your hard-earned and diligently-saved money in order to enjoy life. As you get older, your activity level will decrease. Travel will be more difficult. You’ll probably want to downsize into a smaller house, which will mean lower living expenses.
Your spending needs will probably decrease throughout your retirement years until the last couple years of your life, when your health starts seriously declining and you may need to move into assisted living or a nursing home.
If you wait until 70 to start taking Social Security, you’ll receive a bigger check, but those prime years when you could have enjoyed spending that money will be gone. Also, don’t forget that at 70 ½ you will have to start taking Required Minimum Distributions from your IRA, which will probably result in another increase in cash flow.
2. More money can stay in your IRA and continue to grow.
When you start receiving Social Security benefits, you won’t need to withdraw as much money from your investments. Therefore, more of your money can continue to grow and compound.
Stated the other way, if you delay receiving Social Security, you’ll probably need to draw down more of your investments. I don’t know about you, but I would rather hold onto more of my money than let the government keep it. This leads nicely into the next two reasons:
3. By holding onto more of your savings for longer, you are better prepared for an emergency.
I recently read an article by a so-called “expert” in which he claimed that you should actually spend down your own money before you start taking Social Security, in order to lock in that “guaranteed payment for life” at its highest possible value. This is the WORST. ADVICE. EVER. I pity anyone who has entrusted this guy to manage their life’s savings.
4. By holding onto your savings longer, you will leave a larger inheritance for your spouse or beneficiaries.
Whether you want to spend all of your retirement savings on yourself or leave a big inheritance for your kids is up to you. Believe me, your kids probably want to you enjoy that money yourself.
But that aside, by taking Social Security sooner and leaving more money in your IRA, you’re leaving more money for your beneficiaries if you should die sooner rather than later. Your beneficiaries cannot inherit the social security money you deferred on collecting – the government keeps it.
5. The future of Social Security is uncertain.
I’m not a doomsayer who believes that Social Security will go broke and disappear in some future year. Current estimates predict that Social Security will run out of funds in 2030, but Congress will find ways to trim it here and there to deal with the impending shortfall. Full Retirement Age might get delayed, the maximum age of 70 may be extended, cost of living increases may shrink, and the payout formulas may be tweaked. But something will get done.
Back in 1984, early in my working career, some of my co-workers believed that Social Security wouldn’t be around by the time we retired. Well, it’s still here. The total demise of Social Security is highly unlikely. It would be political suicide for Congress and future presidents.
I decided that I would rather start taking my money with the current formula. The formula may stay the same or it may get worse, but it’s unlikely to get better.
A friend of mine once joked, “Life is uncertain. Therefore, eat dessert first.”
On a more sobering note, I have friends who are younger than I am who have already died before they could enjoy more than a year or two of their retirement.
While I don’t want to be careless with my investment withdrawals and run out of money, neither do I want to reach 85 and still have most of my money unspent.
I want to enjoy my retirement to the greatest extent possible while I’m still young and healthy enough to do the things I have been looking forward to for years.
Starting my Social Security payments at 62 makes that more achievable.
Again, your situation is unique and different from mine. Your mileage may vary.
But the basic statement that you will receive a larger Social Security check the longer you wait is over-simplified and does not take these other significant lifestyle factors into account.
What are your thoughts? Please feel welcome to comment below.
© 2019 Dave Hughes. All rights reserved.