When Should You Take Social Security?
I get that question quite often. It's usually followed by this question: "Should I wait until my full retirement age to start collecting or should I start at age 62 or should I wait until 70?"
Let's get a couple of things straight. First, there is no one right answer to this question. It will and absolutely does depend on each individual's circumstances.
Second, odds are you are not going to beat the system. The government knows on average how long your life expectancy is and Social Security was designed to be revenue neutral. That means if you start taking payments at age 62 you will have received approximately the same total lifetime benefits had you waited until age 70. You get a smaller payment for a longer time or a larger payment for a shorter time.
A general rule of thumb is if you have family history that shows you have a good chance of passing early, take Social Security as soon as possible. If many of your relatives have lived into their 90's then maybe wait until age 70 to collect.
Again, there is no black and white answer here regardless of what people tell you. Talk with a financial advisor and make a plan and include the timing of collecting Social Security benefits in that plan.
A Social Security Break-Even Analysis
The timing of your Social Security benefits can be important. It could make a difference of thousands of dollars in your retirement income. Although there are many factors to consider when making a decision about Social Security (more about that later), it’s fairly simple to calculate your break-even age. Let’s use an example to illustrate the calculation:
Joe has reached age 62 and is trying to decide if he should take his Social Security benefit now or wait until his full retirement age of 66. If he collects now he’ll receive $1,900 per month but if he waits until his full retirement age of 66 he’ll get $3,000 per month. In other words, if Joe waits four years to apply for benefits he’ll get $1,100 more per month. Should he collect now or wait four years?
Essentially, if Joe waits until age 66 he has forfeited $91,200 ($1,900 x 48 months), but stands to gain $1,100 per month. (For purposes of this illustration we’re intentionally ignoring the “time value” of money.) To find his break-even age, Joe would divide $91,200 by $1,100 per month which comes out to 83 months or approximately seven years. That means if Joe waits until age 66 it will take him seven years to break-even on his waiting to receive the benefit.
If Joe has reason to believe that he'll live to age 73 or older (age 66 plus seven years to break-even), it makes sense to delay taking Social Security if he’s able to wait. He's financially ahead of where he would've been had he started collecting at age 62. If his situation doesn’t allow it, he may need to take his benefits now.
Other Factors to Consider before Collecting Social Security
Keep in mind, however, that this is calculating a simple break-even point only. There are many other important factors to consider:
Your income needs
Your health status
Your plans to work after retirement
Your other retirement resources (investments, pensions, 401(k)s, etc.)
The decision regarding when to take Social Security is complicated but it’s a decision that should be integral to your retirement planning and one that many retirees tend to skip. According to the Employee Benefit Research Institute only 23% of workers maximize their benefits by planning when to claim Social Security.
Once you’ve determined your break-even age, I encourage you to take the next steps: Consider your individual circumstances, get some guidance and make a plan. You could gain thousands.
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80/20 Financial Services is the legal name of our Registered Investment Advisory Firm (RIA). Electric Cooperative Retirement Planning is what we do. We are a small boutique type firm that only works with current and former electric cooperative employees and their families. We only work with approximately 50 households at any given time. This allows us to know our clients on a more intimate level. Unlike the big financial advisory firms, you're more than just a number to us.