Social Security may be the most valuable asset you have as you march toward financial independence.
Don’t believe me? If you go to an insurance company and ask them to pay you a monthly benefit from the full retirement age of 66 until the end of your days, the bill would be enormous. A woman would need to spend about $375,000 to purchase an annuity that pays about $2,000 a month. When you consider that Social Security has a cost-of-living increase most years, purchasing an inflation kicker could put you above $500,000. Neglect this personal income treasure at your peril.
For most the soonest they can take retirement benefits is age 62, which is the most common choice. Many who begin at age 62 do so out of pure necessity. They don’t have much saved for retirement and need the income stream to cover their expenses. Others opt for age 62 because they want their money from the government as soon as possible, plan to invest the proceeds, or fear there will be substantive changes in the benefits.
But when you start at age 62, you are accepting a permanently reduced benefit. That 66-year-old woman with a $2,000 monthly benefit would only receive $1,500 a month if she started at age 62. Plus the annual cost-of-living increases will widen the difference between the payments down the road. Those who are truly patient can wait until age 70, when that same person would receive $2,640 a month.
Many people make this decision by determining their break-even age. How long would they have to live for it to be smarter to wait until age 70 versus the full retirement age at 66? For this case you would need to live beyond age 82 for the decision to make sense. But many lose sight of other advantages through this analysis.
By waiting to take Social Security, you not only get a higher payment but also are covering the cost of possible longevity. You are agreeing to be paid less now to ensure a higher Social Security benefit will be there in the later stages of retirement. While living a long life has many benefits, it can be financially inconvenient.
Also waiting until age 70 has a less understood advantage. By maximizing your own Social Security benefit, your spouse can receive your benefit if it’s higher than their own if they outlive you. Many times it makes sense for the lower earning person to wait until their full retirement, and have the higher earning spouse delay until age 70. This method allows many to squeeze even more out of the program.
Another roadblock is that the late filers don’t have a source of income between their retirement age and 70. In this case you can construct a “financial bridge” of CDs or other guaranteed investments that allows you to withdraw from a secure portion of your portfolio. It may represent a high percentage of your portfolio when you first retire, but at age 70 with a higher benefit, you can reduce your distributions significantly.
As simple as Social Security sounds, there are many rules and tricks that can trip you up. Earned income before full retirement age can reduce your Social Security. There are different taxation schemes depending on your income. You even have a chance at undoing your Social Security application in the 12 months after you file if you change your mind. People receiving government pensions and with disabled or child dependents encounter more complexities.
My favorite reference to determine the right path for you is the socialsecurity.gov. A sophisticated and easy to use tool is maximizemysocialsecurity.com, albeit for $40 which is a small price to pay for advice that could be worth thousands. Opensocialsecurity.com is a free open source tool that is promising, although I’d recommend you independently verify its reports.
David Gardner is a certified financial planner with a practice in Boulder County and can be reached with questions at firstname.lastname@example.org and on Twitter @Dave_CFP. The views expressed in this article are the author’s alone.