For a lot of folks, the title question is a no-brainer: take the money and run. Why, you’ve been paying into this system all your life, so you should begin taking it back out as soon as you can, right?
Well, maybe.
The real answer is that it depends on your situation (you knew that was coming, right?). There are several factors that should go into this decision. Your year of birth, for example, determines when “full retirement” can begin for Social Security (SSA) reasons – but it also determines the rate of increase in benefits for each year of delay in retirement. For folks who were born in 1943 or later, the rate of increase for each year of delay before taking benefits is 8%. In other words, if you delayed retirement to age 63, you can expect your benefits to be 108% of the amount you would have received at age 62. At age 64, the amount would be 116.64% more than the amount at age 62, and so forth. This doesn’t take into account the annual cost of living increases.
As you can see, longevity then begins to become a larger factor, since the longer you live, the more benefits you’ll ultimately receive from the system. Under the current arrangement, delaying benefits to age 66 has a break-even point (the point at which the benefits you receive at the later retirement age are more than the cumulative amount received at the earlier age) at around age 78, while delaying to age 70 breaks even at approximately age 80. So, assuming you’re in good health and your family longevity is such that you expect to live beyond those ages, it makes sense to consider delaying benefits.
Your current need for the funds impacts the decision, in a way you might not expect. The above break-even example assumes that you’re spending the SSA money each month. If you’re in a position with adequate retirement income from other sources, such as a pension or other retirement plan, investing the SSA proceeds in a nominal 6% interest-bearing account will increase the break-even points to ages 90 and 95, respectively.
Do you plan to continue working while receiving benefits? If so, assuming you begin receiving benefits at age 62, bear in mind that for every two dollars of employment income above the annual limit (for 2006) of $12,480, your current SSA benefits will be reduced by one dollar. During the year in which you reach your normal retirement age, the reduction is less – one dollar for every three dollars earned above $33,240 for 2006, and the reduction is eliminated for years following your normal retirement age.
Income level, from all sources, impacts taxation of SSA benefits, as well. In some cases it may make sense to plan taking a larger distribution from an IRA in the earlier years to offset not taking the SSA at the earliest age, and then reducing the distribution (subject to RMD rules), to a level that allows you to take your SSA benefit tax-free.
A significant factor is marital status, as well as your accrued benefits versus your spouse’s benefits. In the case of a married couple which sees the husband’s benefits significantly larger than the wife’s, it usually makes sense to delay receiving benefits in order to increase the survivor’s benefit. This holds true for couples who are the same age or when the wife is younger than the husband. If the situation is reversed (husband earned less than the wife and is younger), actuarial rules should be applied to consider longevity and a decision made on that basis.
Generally speaking, when the wife has significant earnings, it makes great sense to begin taking benefits at the earlier age. If the wife has virtually no earnings, she should wait until her husband retires before taking SSA benefits.
As you can see, it’s not always as easy as just choosing the earliest age to begin receiving SSA benefits. After analyzing all of the factors, it could be very advantageous to delay. Understanding all of these factors and how they impact your benefits will help in the decision-making process. Don’t forget to consider these factors – and let me know if you’d like some guidance in the process.
Click the link to pick up a copy of A Social Security Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.
I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
And if you've come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed "advisor's advisor".
[...] your Social Security retirement benefit is very important. (you can see my post on the subject here) The problem is, sometimes we aren’t in a position to delay receiving the benefit… or [...]