Social Security - some factors to consider

As clients approach retirement, one of their main considerations is when to collect Social Security benefits. One can collect as early as age 62, but benefits increase for every year you wait with full retirement age depending upon when you were born. Benefits stop increasing for waiting at age 70.

Many clients want to defer as long as possible to collect the higher benefits. That sounds good and can be appropriate but it’s not that simple. For example, if your benefit would be $2,900 higher per month at 67 but reduced to $2,000/month at 62, that seems like a no-brainer until you consider the $2,000 x 60 or $120,000 that didn’t collect upfront by waiting. What if you die while waiting? In essence you must weigh that $120,000 (and the interest it could have earned) against the $900/month for the rest of your life. Here are some factors to consider:

Do you need the income? If you need the income, it favors collecting early in my opinion because your tradeoff is that if you don’t collect you would need to redeem from your asset base which is discussed below.

What are your thoughts on life expectancy? Few of us know when we are going to die but you may have preconceived notions about your probabilities. Generally speaking, if you believe you will have longevity, that favors waiting to collect as that $900/month difference in my example above will eventually catch up in terms of value.

Are you concerned about protecting income for a spouse that may have a much lower benefit? If so, that may favor waiting and collecting the higher benefit, as that would also increase the value of what the surviving spouse would earn (their own or half of yours, whichever is higher)

Are you an aggressive or conservative investor? Conservative investors may want to delay because the incremental of the $54K in my example is minimized if invested conservatively, and the social security income is guaranteed.

Do you plan to continue working part time? If so, you may want to wait until at least full retirement age, as earned income (employment) above a certain amount could result in a reduction in Social Security benefits.

Do you want to pass on your wealth to kids? If so, that may favor collecting early if the choice is between collecting or redeeming investments for income. You can pass your investments to your kids, but you can’t pass on the Social Security benefit.

There are of course other factors to consider as well. The point is that there is no one answer and it’s not a mathematical equation, it’s based on your situation and your priorities. And you may find yourself with conflicts even on the above items, with some factors favoring collecting and some favoring delaying. It’s in this grey area where we can be valuable in helping you frame your choices against your priorities so that you can make an informed decision for your situation.