One of the most common questions people approaching retirement age have is “When should I claim my Social Security retirement benefits?”. In fact a new client recently asked me “No one in my family has lived past 80, so shouldn’t I claim my Social Security early in order to make sure I actually get to use it?” The timing of that decision can have an enormous impact on your financial situation in retirement, and I find that some of the advice given to people doesn’t show the full picture.
When it comes to determining when you should claim your Social Security retirement benefits, the traditional wisdom is to use break-even points. Break-even points require a person to consider how long they would have to live in order to benefit from delaying their Social Security retirement benefit. The chart below shows break-even points organized by the age of the individual.
You can see that the next 3 columns after age have monthly, annual, and cumulative income for those who withdraw early, at the age of 62. The next 3 columns marked as “FRA”, show monthly, annual, and cumulative income for those who withdraw at their full retirement age. The last 3 columns marked as “Later” show monthly, annual, and cumulative income for those delay claiming their Social Security benefit until age 70.
They way you’d use this table is to look at the cumulative columns to see how many years it will be before the cumulative benefit of waiting to claim surpasses the cumulative benefit of claiming early.
The numbers in red give an example of the cumulative benefit of waiting until Full Retirement Age (66 in this example). You can see that this person would have to live to 74 in order to get a larger cumulative benefit by waiting until their Full Retirement Age of 66. The numbers in green show the cumulative benefit of delaying until 70 and you can see that this person would have to live to 76 in order to get a larger cumulative benefit by waiting until age 70 to claim.
Many advisors may say that if you think you’re going to live past age 74, it might make sense to delay claiming until full retirement age or if you’re going to live significantly past 76 it may make sense to delay claiming until age 70. This traditional wisdom seems to make sense but it ignores an important group, married people.
Using break-even to make the decision about the timing of claiming your Social Security retirement benefit would really only make sense if you are a single, non-married person. That’s because the break-even point is comparing what happens upon your death and which cumulative benefit option came out ahead. It completely ignores the fact that if you’re married, there is still a surviving spouse that has ongoing income needs. Unless both spouses die at the exact same time upon the break-even points, which is highly unlikely, it’s useless for a married couple to use break-even points to decide when to claim their Social Security retirement benefit.
If a married person determines they’ll take their retirement benefit early at age 62, their surviving spouse is going to inherit that smaller benefit at the death of the first spouse. And this benefit will remain for the rest of their life. The surviving spouse may live another 10, 20, or 30 years and they’ll be stuck with the smaller Social Security benefit due to it being claimed early.
When determining when you should claim your Social Security benefit, don’t use only a break-even analysis to determine the ideal claiming age. If you’re married, you’ve got 2 lifetimes to consider and it is important to consider what your spouse will end up with in terms of an ongoing Social Security benefit.
If you have any questions about maximizing your Social Security retirement benefits, please contact me here.
