Social Security Strategy- A Closer Look

Reader comment:  In your recent column it really seems that you have had at least a sip of the proverbial cool aid in your advice against taking Social Security at 66.  A simple spread sheet shows that if you bank the after taxes SS benefits for four years you will not catch up with the added benefits (after waiting until 70) until you are over 80, even without earning an thing on those banked funds.  If you throw in a modest interest rate, the crossover goes to 90 or more.  Since most of us will not live to reap the “benefits” of waiting, it truly makes no sense. That said, I will admit that there may be cases involving survivor benefits where it might make sense. I suspect that this might affect a small minority of folks with much younger spouses.  Since SS is the dominant source of income for a fair number of folks, I think you could devote a large portion of a future column to the nuances, rather than restating the SSA’s canned language as pure fact.

My response:  I do think it’s a fair comment that deciding when to begin Social Security is more complicated than simply saying, “Delay benefits until age 70”.  Decisions around Social Security are more complicated than they appear and for most people, professional guidance is strongly recommended since some decisions cannot be undone.  Let’s explore a couple of the ideas and strategies around this important decision:

  • Delaying Social Security (SS) until age 70. If you have good health and a family history of longevity, delaying Social Security benefits can be an excellent strategy.  Assuming your SS full retirement age is 66, for every year you delay taking benefits, your SS income rises 8% or a total of 32%.  Assuming there are cost of living adjustments (COLA), those additional benefits will also accrue in your favor.  Our estimate is that if you live into your early eighties, you’ll break even versus having started benefits at age 66.  The longer you live beyond that, this strategy works in your favor.  Being a persistent optimist, I believe we’ll continue to see medical breakthroughs that will extend life so I like my chances using this strategy.  Of course, this assumes you have other sources of income that allow you to postpone SS benefits.  If you happen to be married, this strategy greatly increases your odds of benefiting from this strategy.  This is because at your death, your spouse gets to take over your SS if it’s higher than her (or his) own benefit.  An extreme example of how this can play out is with my own father.  He was still working at age 70, so he chose to delay benefits.  My mother, who never worked outside the home, lived to age 89.  My father, now age 97, has received over $1.3 million in SS benefits (including mother’s benefits).

Average life expectancy for a sixty-six-year-old today is about 18 to 19 years (age 84-85).  Remember, this is ‘average’ life expectancy…meaning half live longer than the average. For those people with good-to-excellent health, particularly if they are married, delaying SS to age 70 can be a good strategy.

  • Taking Social Security early. You can begin taking SS as early as age 62.  If you choose this strategy, your monthly benefit will be reduced by 25% (30% for spousal benefits) as compared to your benefit at full retirement age 66.  Why would we ever recommend this?  The main reason is poor health.  If your health is not good, getting a smaller benefit sooner can be a good strategy.  Another reason to take an early benefit is you need the income now.  As an example, let’s assume your benefit at full retirement age (66) is $20,000.  If you begin at age 62, you’d receive $15,000 but you’d get a four year head start; so between age 62 and 66, you’d collect $60,000.  Ignoring cost of living adjustments, your breakeven would be in your late seventies.

These are just two of the many possible options you have related to SS benefits so I want to reinforce the importance of getting professional help with this decision.