One of the most important decisions in retirement planning is the decision about when to start receiving Social Security benefits. Many people realize that they can maximize their monthly check-ups by starting to take them at age 70, but this is not always the best option. There is no right answer that applies to everyone, and every option comes with trade-offs. Still, there are a lot of people who should have taken Social Security well before 70, and there is usually one main reason behind it.
In most cases, if the retiree is better off Social Security Benefits Earlier, it was due to the backlog of payments. You’ll increase your monthly check by waiting until age 70, but there’s a catch-up game that takes a few years to play.
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Consider the person who will get $1,700 per month in full retirement age (FRA). The Social Security program creates an incentive to delay the receipt of benefits, and that monthly check will change, depending on the age that person starts collecting. The options might look like this:
- $1,190 per month at age 62
- $1,474 per month at age 65
- $2,108 a month at age 70
This is a very relevant example because it is close to a file current average interest. Someone starting an FRA will collect more than $60,000 in Social Security by age 70. If that person starts at 62, it will result in the smallest monthly check possible, but that person will still collect more than $114,000 in cumulative Social Security benefits by age 70.
The break-even point for cumulative benefits is between ages 80 and 83 in these scenarios. If Social Security benefits are put into some high-yield savings vehicle, the net break-even life can be pushed back even at a later time.
This creates the classic “bird in hand” scenario. Obviously, it’s great to maximize your monthly Social Security income, but there are plenty of scenarios when it’s best to have cash on hand right now.
When do cumulative benefits really matter?
With this trade-off in mind, each family has to determine exactly how it relates to their personal circumstances.
For example, consider healthy people with a long life expectancy who can easily cover their cash flow needs with retirement or pension savings. They probably don’t need to supplement cash flow with Social Security before age 70. These retirees have the luxury to maximize their expected income, and they will have the largest guaranteed cash flow over subsequent years. Doing so can also enhance the inheritance benefits that the spouse may receive, especially if the spouse does not have a work history to claim retirement benefits.
Unfortunately, this does not apply to most Americans. Social Security is really important to most families. About 40% of people have no other source of retirement income. If you depend on Social Security for your cash flow needs, you obviously don’t have the luxury of being late.
This can also apply to families who are not completely dependent on these benefits. People tend to be more active early in retirement. That means more vacations, more dinners out, and more time to visit with the grandkids. These costs can accumulate, and Social Security can be really important for ensuring that your retirement accounts aren’t exhausted too soon. Overspending on your money is the most prominent financial risk in retirement, and a guaranteed additional income stream is great for minimizing this risk.
People who choose to receive smaller payments earlier may not lose out on income either. Life expectancy in the United States is about 79, so people should take longevity into account when planning for retirement. Remember, it takes several years to break even in cumulative Social Security benefits for people who delay in favor of larger monthly checks. Many people who delay Social Security until age 70 will actually reduce the total amount they receive from the program if they die before age 80.
Social Security is a major part of your financial plan in retirement. It is important to consider all of your options, educate yourself about the possible outcomes, and make the decision that is best for your personal circumstances.
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