30 April 2008
In my line of work I occasionally have to think counter-intuitively since sometimes the quick answer is not always the right answer. Listening to conversations at cocktail parties would tell me that the quick answer with social security is to take it at 62 versus waiting until full retirement age (65 or later, depending on what year you were born). After all, people have worked hard for the right to take social security as soon as they qualify. But more and more I am seeing the logic in postponing the benefits.
The gray area in taking benefits actually starts with a more basic question – how is your health and the health of your spouse? If you are in poor health and do not expect to live past a “break even” age – that point when the reduced benefits you take early are offset by the higher benefit of postponing until full retirement age should you live a longer life – then taking benefits early make sense. In general, break even age will be somewhere between age 75 and 80. The Social Security Administration provides a calculator to help in this - http://www.ssa.gov/OACT/quickcalc/when2retire.html. Of course another reason to take benefits earlier is the need for more income.
But there is wisdom in taking benefits later. This is often ignored, even by many financial planners, since it is easier to default to taking money when it is offered early. One of the main reasons I see to delay the benefit is to allow the benefit to grow more than other assets in your portfolio can. For every year of delay, the benefit amount increases approximately 8%. In today’s volatile market, that is a great return. Just pushing the decision from age 62 to 65 buys you approximately 24% higher income. That is like having the most generous boss alive! But just as important is that the longer you delay, and the larger that benefit becomes, the higher the payout to the lower income spouse who will qualify for 50% of the higher benefit, and upon death of thüe higher earner, 100% of their benefit. In reviewing these numbers, financial plans are lasting longer when this increased wealth affect is taken into account as clients get into their 80’s. These higher payouts act like a buffer to portfolios that might be stretched thin by travel and leisure early on in retirement, but also possibly high medical costs later on in life.
I would like to take this idea one step further and introduce the prospect of filing and suspending. Assuming the social security income is not needed at full retirement age the social security administration will allow the higher income earner to file for benefits but then immediately suspend the benefits due before the first check is even cut. In doing this, you can continue to accrue your 8% annual increase in benefit until age 70. Yet the lower income spouse, assuming full retirement age, immediately qualifies for their 50% benefits based on the higher number since the higher earning spouse officially filed. And when the higher earning spouse passes away, the 50% gets moved back up to 100% survivor benefit which will be based on the higher amount.
The easiest answer in looking at social security benefits is that you have to run the numbers. There is no one right answer and even if we think we have a right answer, our own health prospects might play into the decision more than we would want. What I have learned over the years, though, is that the right answers are rarely given at a cocktail party.