I just don't like blanket statements regarding when to take Social Security benefits or the idea that bigger is always necessarily better when it comes to such things.
A recent US News and World Report article noted regarding Social Security benefits that, "You can begin benefits as early as age 62 or wait until turning 70. The difference in monthly benefit payments is huge. For each $1 in benefits you'd get when claiming at age 66 (the so-called full retirement age for most people right now), you'd receive only 75 cents if you claimed at age 62, but $1.32 if you waited until age 70."
This example tends to make it sound like waiting to take Social Security is the right move; however, it may not be that simple. In fact, I find myself wanting to ignore such advice altogether.
A simple example
Let's look at a simple example of how waiting until I'm 70 could backfire. We'll assume for ease of this example and since it's the number the US News and World Report article used that I'll get $1,000 if I take benefits at 66 (full retirement age). According to article that amount would be $750 if I decided to take benefits at age 62 and $1,320 if I waited until age 70.
According to the CDC, in 2010, the average life expectancy was 78.7 years of age. Let's say I live until 80 for ease of this example.
Not factoring in cost-of-living increases to Social Security benefits, this means I'll receive the following amounts over time:
- Benefits from age 62 to 80 -- 216 payments (18 years x 12 monthly payments) x $750 = $162,000 in benefits
- Benefits from age 66 to 80 -- 168 payment (14 years x 12 monthly payments) x $1,000 = $168,000 in benefits
- Benefits from age 70 to 80 -- 120 payments (10 years x 12 monthly payments) x $1,320 = $158,400 in benefits
Investing proceeds or paying off debt
So looking at the above options, let's say that I decide to take benefits at age 62 even though I may not be in dire need of the money. With cash in hand, I could invest that money to make more money or use it to pay off debt with higher interest rates on things like credit cards, a mortgage, or student loans for the kids' schooling, creating a more secure retirement and increasing my peace of mind in the process.
Other factors to consider
Of course there are other things to consider when making the decision as to when to take Social Security benefits. My family has a history of longevity, but to me, this means that I could just stretch my payment period out even further if I start benefits early. Financial need could play a part as well, since some people may not have a choice as to whether or not they can wait to take benefits.
But maybe more importantly (at least to me) is the idea of estate planning. Should my Social Security benefits roll over to my children or be transferrable, it might be worth it for me to take them later in life. However, I'd prefer to use those benefits -- rather than living off my own savings and assets -- so that when I die, I can pass something along to my children. Since they won't be inheriting my Social Security benefits, I'd rather utilize the money I've paid into that system first before drawing down upon any assets of my own.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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