The Cost of Delaying Social Security
Welcome back to the Confident Retirement Journey. I’m Craig Sullivan. Today we’re going to dive deep into one of the most crucial decisions you’ll make as you approach retirement. Should I delay taking Social Security to maximize my benefits and will I really get 8% more each year if I do so? Let’s explore this topic in detail. First, the basics of the 8% increase. You might’ve heard that if you delay social security beyond your full retirement age, your benefits will increase by 8% each year until you reach age 70. What exactly does this mean, and is it as straightforward as it sounds? Well, here’s how it works. After your full retirement age, let’s say for you it’s age 67, you’re eligible to receive 100% of your benefit for each year. You delay taking Social security, your benefit will increase by 8%, so by age 68 you get 108%, age 69, 116%, and so on until age 70, where you max out at 124% of your benefit.
It’s crucial to understand that this 8% increase is a simple interest rate applied to your primary insurance amount, not a compounded investment return like you might get in the stock market. Second thing to consider is the breakeven point. A critical concept on deciding when to take Social Security is looking at when would that breakeven point occur. The breakeven point is the age at when the total amount of money you received from delaying your benefits surpasses the amount you would’ve received if you started taking them sooner. As an example, if your full retirement age benefit is $3,000 per month and you delay until age 70, you receive an additional $720 per month or a little over $8,600 more per year. However, you’d be giving up three years of benefits, three years of payments, $108,000 in total from age 67 to 70, divide the breakeven point. You simply divide the 108,000 by your annual increase of a little over $8,600, which is going to give us about 12 and a half years.
So if we add that to age 70, your breakeven is 82 and a half years old. That means if you live beyond 82 and a half years, delaying your benefits could be worth it, but if you don’t expect to live that long, claiming earlier might be the better choice. That brings us to longevity and really just personal factors. One of the most significant factors in deciding what we should do with your social security is you’re expected to life expectancy. If you have a family history of longevity or you’re really good health, delaying benefits could maximize your lifetime social security income, but it’s not just how long you live. You also need to consider factors like cost of living adjustments, which are applied to your benefit amount and potential taxes on your Social Security, depending on your other sources of income. Another important consideration is your spouse’s benefits.
If you’re married, remember that social security decisions doesn’t just affect you. It impacts your spouse too. For example, if your spouse claims benefits, they can receive up to 50% of your full retirement benefit, or if they outlive you, they could receive the greater of their benefit or yours, including any delayed credits. Now, what is the cost of delaying social security? Think about it this way. If you claim at age 67 you start collecting $36,000 annually by delaying a year, you could forego that 36,000 and while your benefits at age 68 would be $38,880, the real question is whether that increase outweighs the value of the benefits you missed out on. This is where you need to evaluate the opportunity cost. Could you invest the 36,000 you’d collect at age 67 and potentially earn a return that competes with the 8% increase? If not, is the guaranteed increase still worth it to you?
It’s important to understand the role of Social security is longevity insurance. This is a guaranteed income stream that you cannot outlive an incredibly valuable asset, especially if you’re concerned about outliving your savings. While it’s tempting to think of this decision, surely in terms of numbers, remember that social security is designed to protect you against the risk of living longer than expected and running out of money. As one planner puts it, social security should be viewed as longevity insurance for many, collecting the highest possible benefit by delaying couldn’t be worth it, especially if you expect to live well into your eighties or beyond. Should you be taking Social Security? It really depends on your health, financial situation and personal preferences. Delaying could be beneficial if you expect to live longer and want to maximize your guarantee income, but it’s not the right choice for everyone. If you’re approaching retirement and want to make the best decision for your social security benefits, consider working with a financial advisor who can help you with all these factors.
Thanks for watching the Conf and Retirement journey. Hope you’re doing well. Remember to explore the possibilities and think better.