Some Americans claim Social Security before full retirement age because they worry the program will run out of money. In fact, one study found that more workers report a desire to claim benefits earlier when news coverage of the program’s finances is negative.
But is that really a good reason for claiming Social Security early? After all, delaying means receiving a higher lifetime benefit.
At Advance Capital Management, helping clients choose the right time to file for Social Security is a key part of our retirement planning process. We know that Social Security is one of the primary sources of income for most retirees. And, there’s no one-size-fits-all claiming strategy. The right age for you depends on personal factors, such as your health and retirement savings.
With that said, there are very good reasons for claiming Social Security early. But the fear of having your benefit cut shouldn’t be one of them because it could ultimately backfire. To help you make a more informed decision, this article provides reasons why you might consider taking your benefit early.
The Social Security problem
First, let’s address the elephant in the room.
Social Security’s finances are under pressure because of the aging U.S. population. The number of workers contributing payroll taxes is rising at a slower rate than the increase in Social Security beneficiaries, as generations with lower birthrates replace the baby boomers in the workforce.
This often leads to news reports of potential benefit cuts if Congress fails to act to shore up the program’s finances. Of course, this creates a lot of uncertainty and anxiety among people trying to plan for retirement.
Certainly, the program has been modified in the past. But considering the importance of the program, the expectation is that Congress would prevent changes that dramatically impact current recipients. Any changes, like tax increases or benefit reductions, will likely impact workers rather than retirees.
So, claiming benefits early to protect against potential benefit cuts is a gamble. You risk accepting a lower monthly income for life to fend off something that is unlikely to happen.
What about delaying Social Security?
Social Security allows you to start retirement benefits any time between ages 62 and 70. It increases the payment for every month you delay.
You receive your full benefit at age 67, which is the full retirement age for most Americans. Claiming your benefit at an earlier age starting at 62 means receiving a permanently reduced benefit. But if you delay taking Social Security until age 70, you receive a benefit that is 76% higher than at 62.
While the math may favor delaying Social Security, the right answer varies from person to person. The size of your benefit is only one part of the equation. Other factors, including your life expectancy, retirement expenses and marital status, are also important.
For some people, waiting to file doesn’t make sense. Instead, they have good reasons to take Social Security early.
Reason #1: You don’t have enough saved to delay
Some people about to retire should consider filing early because they don’t have enough savings to delay claiming benefits. In other words, they simply need the money. Consider the program provides 37% of men and 42% of women with half or more of their income, according to the Social Security Administration.
So, if you find yourself out of the workforce and need the money, then file for Social Security as soon as you’re eligible. Unless, of course, you haven’t reached your full retirement age and still plan to work. Then you should calculate how the earnings limit could affect your benefit. Once you reach full retirement age, the earnings limit no longer applies.
Reason #2: You or your spouse may have a short life expectancy
Claiming earlier makes sense for those with relatively short life expectancies. A person who postpones benefits until age 70 instead of 62 would have to live to at least 80 to maximize total lifetime Social Security income and come out ahead.
Therefore, a larger benefit won’t mean anything if you have a health concern that keeps you from ever using it.
Further, if your spouse is the higher earner and has a short life expectancy, you may want to claim your own benefit early. If your spouse passes away early, you will then start to receive his or her higher benefit. Therefore, it would make little sense to wait to increase your own benefit.
Reason #3: Your spouse is older and earns less than you
Another scenario is if your spouse is older and earned less than you. In that case, the spousal benefit based on your record is likely the highest benefit they will receive. But your spouse cannot receive that benefit until you file for your own benefit.
Filing early will reduce your benefit, but it will unlock the benefit for your spouse. Spousal benefits don’t increase once the person reaches full retirement age. So, if your spouse is older, he or she would be missing out on benefits while waiting for you to file.
Reason #4: You qualify for a survivor’s benefit
An interesting rule about survivor benefits is that you are allowed to change from one benefit option to another, and back again. Those receiving a survivor’s benefit, therefore, may want to file early. That’s because you could take the survivor’s benefit early and then at age 70 change to your own benefit, which will have by then grown by as much as 24%.
Reason #5: You’re caring for a minor or disabled child
A minor or disabled child may qualify for their own benefit when you file. By filing early, you will trigger your own reduced benefit but at the same time a benefit payable to your child. This is another instance in which you need to be cognizant of the earnings limit should you still intend to work.
The bottom line
At Advance Capital Management, we help clients make informed Social Security decisions based on their personal circumstances. The reasons above are just examples. Your own situation could align with one of them, but other factors may dictate that you do something entirely different.
Instead of taking general advice, work with a professional to properly decide what Social Security claiming strategy is best for you. Social Security is too important – and can be too tricky – to simply follow in the footsteps of others. The goal is to organize all your income resources to meet your needs, not to just maximize one benefit.
Advance Capital Management is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
