Good Things Come To Those Who Wait

October 01, 2015

I was recently talking to my parents about Social Security and was surprised to discover that they had no idea they could delay their benefits past their retirement.This is important because it’s usually the best strategy yet most people collect at the earliest age of 62. Here are some reasons why delaying might make sense:

1) Taking Social Security while working can subject more of your benefits to taxes. If you delay Social Security until you’re no longer earning wages, you may owe taxes on less or even none of your Social Security benefits since the percentage of your benefits that are subject to taxes depend on a calculation based on your total income

2) Your Social Security benefits grow by 8% per year they’re delayed. Are your investments getting that type of return every year? If not, consider using your investments to bridge the income gap so you can let your Social Security earn that 8% “return.”

3) If you’re married, one of you can collect spousal benefits while they delay. Here’s how it works. Let’s say you decide to delay your benefits until age 70 and your spouse has filed for benefits. When you reach your full retirement age, you can apply to collect a spousal benefit that’s equal to half of your spouse’s full retirement benefit (even if they started collecting benefits early). While you collect this spousal benefit, your own benefits continue to grow by 8% a year until age 70. At that point, you can then switch to your own higher benefit so you basically just collected extra money in the form of the spousal benefit while you delayed your own.

4) Even without the spousal benefit, you’ll probably collect more by waiting. Since Social Security benefits are based on old actuarial tables, the break even point is in the early 80s. That means if you delay your benefit, you’ll collect more overall just by living past that age. Since the current life expectancy for 65 yr olds is 85 for men and 88 for women, you have a pretty good chance, especially if you’re female and in good health.

5) The bigger financial risk is living longer. What if you live below life expectancy? You won’t have collected as much in Social Security benefits but if you’re married, your spouse will be eligible for a larger survivor benefit. The real financial risk is living past life expectancy and not having enough income since you chose an earlier and lower benefit. This could be especially important if your investments don’t perform as well as you hoped.

This doesn’t mean everyone should delay. If you don’t have enough retirement assets to bridge the gap or if you’re particularly worried about a short life expectancy, you might want to take it early. Whatever you decide, just make sure your decision is an educated one because once you start taking it, you can’t change your mind!