When to file for Social Security is a question that we regularly receive as a wealth management firm. It’s a component of retirement planning with over 500 different possible modalities of filing. There are many rules involved and it’s important to determine a strategy that grants you the best possible benefit.
Tell us when you are going to die and we’ll tell you, with 100% certainty, exactly when you should file for Social Security to maximize your economic benefit. With such known variables, it becomes a simple arithmetic equation. But of course, one does not simply know their impending expiration date. (More on this later).
Unlike a box of cereal, the complexities around solving for life’s longevity issues—running out of money before running out of time—involve making educated predictions about the probability of your outliving a specific age.
Plainly, what are the chances you’ll live beyond X age? If you come from the lineage of Methuselah, then you may wish to delay filing for Social Security until you are age 70. This ensures you receive the maximum amount, which becomes mathematically advantageous somewhere around the age of 83 for most people.
But sometimes there may be reasons for filing Social Security much sooner than age 70. Logically, this means you’ll be receiving a smaller benefit, and it seems counterintuitive. We explore a few reasons for doing so below, including a brand-new reason that has crept up on retirees.
Waiting for a Higher Spousal Benefit
The first common reason for filing early for your Social Security benefit is in a marital circumstance. If one spouse made substantially more than the other spouse, commonly in cases where one was a full-time parent for years, the “Spousal Benefit” (half of the higher earner’s primary insurance amount) may be higher than their own benefit, even if maximizing their own benefit to age 70.
In this circumstance, it may be advantageous to take the Spousal Benefit instead. However, the Spousal Benefit should be claimed only when the higher earner begins claiming on their own Social Security benefits, which is often their age 70.
This means that they will earn no Social Security benefit until then, and therefore should consider filing their own benefit as soon as they can: age 62. This allows them to receive their own smaller benefit during those years while waiting for the higher earner’s benefit to max out, then switching to the higher spousal benefit later when available.
If this benefit is around $500/month, that’s nearly $50,000 that would be left on the table by not utilizing this strategy. Just make sure you understand the more intricate rules involved.
You’re Made Aware of Your Expiration Date
The conventional advice of waiting to maximize your Social Security only works if you live long enough to hit the point of break-even. The years that you wait to maximize your benefit are years of dollars that could be in your pocket.
So how many years of receiving the higher benefit will it take to make up for not having received a lower benefit but much earlier? If waiting until 70, it’s generally 12 to 13 years as stated above. If you’ve made the decision to file at any other age, the equation changes.
But if you’ve recently become aware of a health challenge that may preclude you from living long enough to pass the break-even point, then perhaps you may wish to consider filing for your benefit earlier. This could be as early as 62 but can be any time after.
In this case, take the money when you can so that you can be earning as many dollars as possible while you still can. The information that you have about your health can help your advisor determine when it makes the most mathematical sense to trigger your Social Security benefit within the context of your plan.
The Increase is Not Lifestyle-Changing
If you have qualified, eligibility for a Social Security benefit starts at age 62 (Minimum Retirement Age, “MRA”) under normal circumstances.
The main reason for delaying your Social Security benefit is for the increased amount. There is roughly a 25-30% increase for waiting until your Full Retirement Age, (“FRA”, 66/67), and an 8% increase for ever year delayed beyond your FRA until 70, prorated monthly.
If you’ve been a diligent saver and investor over the course of your career, this additional increase in Social Security benefit may not actually be significant enough to create a meaningful change in lifestyle. In 2022, the SSA defines the difference between the maximum benefit at your FRA compared to age 70 as around $10,000 for the year.
While anyone would appreciate an additional $10K annually, having substantial assets may already allow you to live your life in a way that an additional annual $10K wouldn’t allow enough of a “lifestyle bump”.
One important consideration is that COLAs, or Cost of Living Adjustments, are based on this increased amount. This means that the additional $10K in the first year becomes larger in the second, and even more so in the following years. The COLA is applied on a higher based to start, and on a continually higher base through the remainder of your life. Depending on how long you live, this may add up to a few hundred thousand dollars of extra income throughout the course of your retirement.
Contextualizing this additional income must be done within the confines of a formalized retirement plan, using models created both with and without the income to determine how much “life” this extra income can really provide. And this all depends on how well you’ve saved so far, of course.
If your retirement date coincides with a year where the markets are not cooperating, such as this year, it may be beneficial to tap into your Social Security benefit earlier. This does not come without cost, both in monthly income as well as your potential total lifetime benefit, but it may be worth it if your portfolio has taken a significant hit.
When retired, your portfolio is one of the sources that will provide you with monthly income to meet your needs. If your portfolio has been significantly reduced because of market volatility, you would be realizing investments when they’re down in value, effectively making your losses permanent by not allowing them time to recover.
Depending on the size of your portfolio, the reduced Social Security benefit may be much less than the potential recovery and regrowth of your investments. Factor in many more years beyond the recovery and the opportunity cost is significant if you locked in losses during the down market. An earlier benefit may allow you to defer portfolio withdrawals to allow the time it needs to recover.
Brand New in 2022
If the Social Security COLA is higher than 8%, then it may be worth starting Social Security prior to maxing out your benefit at age 70, especially if you only have one more bonus increase. Each year for waiting beyond your Full Retirement Age (FRA) earns you an additional 8% bonus.
If the COLA is higher than 8%, it may be worth starting Social Security to earn the higher COLA instead of the bonus.
Throughout the course a family’s retirement, there are many events, both economic and in your lives, that cause the necessity of reassessing “the plan”. Tapping into Social Security earlier than originally planned may become a strategy that can help extend the longevity and sustainability your financial independence.
Keep an open mind to the ever-changing environment and world in which we live so that you’re always making the best choices about your family’s wealth. After all it’s not just your money, it’s your future.