“Good things come to those who wait.” “Time is money.” “Patience is a virtue.” All famous adages that you probably didn’t ever associate with one of the main discussion points of retirement, Social Security.

The timing of when to take Social Security is a major decision point for retirees, their retirement plans, and cash flow planning. As you probably are aware, you have the decision as to when to start taking Social Security benefits. Not a ton of guidance is provided from the Social Security Administration (SSA) as to how to make this type of decision, yet it will have meaningful impacts on what the monthly benefit ends up being. This article will address why this decision matters, how the decision impacts the benefit, and some considerations as you make your decision.

In November of 2021 I wrote an article titled “Life Expectancies & Retirement Planning.” That article focused on longevity risk, or the possibility an individual will live to such an advanced age that they will deplete their retirement savings and be forced to rely solely on Social Security and Medicare for their expenses. Improvements of living conditions and advances in medicine are resulting in Americans living longer than ever before.

New data from the Society of Actuaries (SOA) tells us that a 65 year old male has a 54% probability of living to age 85. For a 65 year old woman, the likelihood of reaching 85 is 65%. According to the same data, 1 in 3 65 year old men in average health have a chance of living to 90, and nearly half of women age 65 in average health will make it to 90. For context, in 1935 when Social Security was implemented, the male life expectancy was only 61. Main takeaway, American retirees are living longer than ever and in an increasing proportion relying more heavily on one of their perpetual streams of income, Social Security.

As many are aware, there is an “enrollment window” for claiming social security benefits. You can claim them as early as age 62, referred to as early benefits, or you can delay taking them as late as age 70, “delayed.” By electing to take benefits early, your benefits will be reduced permanently. Full Retirement Age is when you become eligible for unreduced Social Security retirement benefits. The year and month you reach full retirement age depends on the year you were born.

For example, let’s say you turn 62 in 2022, your full retirement age is 67, and your full retirement benefit at age 67 would be $1,000. If you were to elect to begin taking benefits early, then your benefit would be reduced to $700 per month, or by 30%, forever. If you claim early at age 63, your benefit will be reduced by 25%, If you claim early at age 64, your benefit will be reduced by 20%, If you claim early at age 65, your benefit will be reduced by 13.3%, If you cwaim early at age 66, your benefit will be reduced by 6.7%.

The inverse is true when electing to delay taking social security benefits, the later you wait past age 67, the more your benefits increase up until they are capped when you reach age 70. On average, these benefits increase by about 8% per year you delay taking them.

Many retirees are quick to begin taking Social Security early, accepting the dimished benefit on account of collecting it sooner. However, given the above obvervations on life expectancy, this may be a short sighted decision. Consider the below illustration where we compare 3 different social security beginning points, early at age 62, FRA at age 67, and delayed at age 70.

At initial glance, the blue line representing taking benefits early at age 62 looks to be an advantage, right up until the late 70’s. The intersection of these lines represents a concept called “the point of indifference.” The point of indifference is when the retiree who elected to wait until age 70, who receives larger monthly benefits, passes the blue line in terms of net dollars collected. As you can see, above and beyond the late 70’s, the individual who elected to delay benefits ends up collecting many more dollars from social security than the individual who elected to take them early.

Understanding this dynamic is very important for retirement planning, especially in the context of retirees having longer life spans than ever before. Given the observations above about the number of retirees who can expect to live into their 90’s, the chart shows that there ends up being a substantial increase in benefits collected over their lifetimes.

Some considerations

Last month I wrote about the historically significant COLA adjustment for Social Security benefits. It is important to note that these COLA increases are baked into your Social Security benefit even if you are not currently collecting benefits. These adjustments will be considered in your benefits on estimates, so you are not “missing out.”
It is important to consider your various sources of retirement income. For some individuals who may have a defined benefit plan, or pension, it may be easier to delay benefits and manage cash flows. For others, it likely relies on various retirement cash flow modelings to see how you may be able to support a lifestyle from other qualified or non-qualified retirement accounts.
Longevity considerations are important. While we can rely on statistical data to understand the general likelihood of living to an advanced age, there are many other considerations to weigh. General health, lifestyle, medical conditions all must be thoughtfully considered before claiming your Social Security Benefits

If you have questions about your Social Security benefits, the timing of them, or how they fit into your overall financial plan, please contact your Clearwater Capital Advisor.

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