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After contributing to Social Security for all of your working life, you might think that you should claim your benefit at 62 to get as much money out of the system as possible. While it’s true that you’re eligible to claim your benefit at 62, doing so could actually mean that you’re leaving money on the table.
Each year that you wait (up until age 70), your monthly benefit increases. So the longer you wait to take Social Security, the bigger your monthly check will be. And because you will lock in that higher benefit for the rest of your life sometimes the payout can be more in your favor over time.
So, how do you decide when to take Social Security? Many of us want to wait for the higher benefit amounts but we need a paycheck sooner and so the decision can sometimes be difficult to make.
Here are a few examples of when it might make good sense to wait.
IF YOU’RE STILL EARNING AN INCOME
Though you can start claiming social security benefits as early as age 62, individuals born in 1960 or later do not reach full retirement age (FRA) until age 67, and taking benefits before that age will reduce your benefits as much as 30%. You can use this Social Security Administration chart to find your personal FRA and benefit reductions for you and your spouse.
Regardless, if you haven’t reached your FRA and are still working, Social Security will dock your benefit if you earn more than $18,960 per year. This can be a big chunk out of your benefit so if you’re working, it may make sense to wait at least until your FRA to claim benefits.
IF YOU DON’T NEED THE MONEY IMMEDIATELY
If you’ve saved for retirement, you may be able to live off of those savings while you continue to let your Social Security benefit grow. Once you reach your FRA, your benefit will grow by 8 percent each year up until age 70, which can make a big difference in the amount of money you receive each month, for the rest of your life. One way to accomplish this is with a Fixed Index Annuity that provides lifetime income payments. Receiving income payments from your annuity when you retire might enable you to wait and take social security a little later.
Let’s say your FRA is age 66 and your monthly benefit is $1,000. If you claim Social Security at 62, you would receive $750 per month. But if you waited until you turned 70, your benefit would increase to $1,320. That means the difference of $6,840 per year for life. That increased Social Security benefit on top of your Fixed Index Annuity income payments might very well, set you up with more substantial income for life than you had even anticipated.
IF YOU’RE HEALTHY
Another reason to consider letting your Social Security benefit grow is if you think you might live a long time. When planning on living long, even if you are healthy you have to plan for the fact that healthcare expenses are subject to inflation just like other costs of living requirements. A higher Social Security benefit combined with an option like a lifetime income annuity can often be the perfect combination to help you offset inflation in your retirement planning.
On the flip side, if you have a serious medical condition or have been told that you’re at high risk for developing one, it may make more sense to take your social security benefits as soon as you’re eligible. But with that in mind, you may also want to think about longevity in your spouse and his/her income needs throughout their lifetime, because claiming your benefit early could reduce your spouse’s widow(er) benefit.
We often run into husbands who are trying to help take care of their wife after they have passed away. Frankly, this can be a concern for either spouse, but statistically women do tend to live longer than men. There's more info on this later in this article but ultimately yes, it would be good planning for the husband and/or wife to have a strategy in place that will help a surviving spouse ensure that he or she will not outlive your combined retirement savings.
A financial professional who specializes in retirement income strategies can help you determine what makes the most sense for your financial situation.
IF YOU HAVE A FAMILY HISTORY OF LONGEVITY
Knowing how old your biological parents and grandparents lived to be is another factor to consider. There are of course many environmental, lifestyle, and medical factors that could come into play; for example: Did you know that women just generally tend to live longer than men? Women who reach the typical retirement age of 65, are statistically prone to living for another 20 years or more while 65-year-old men’s average life expectancy is to live another 17 years. That means that without even considering family history, women need to prepare for higher income benefit payouts over their lifetime.
Because family history and other factors like the example above can give you a sense of your potential life expectancy, you can use that information to help you decide whether to start claiming your social security benefits sooner rather than later.
Another factor to consider is that a long life also means that the retiree is likely to face the expense of long-term care services. Whether it be in the form of home care, assisted living, or a nursing home, longevity requires more income later in life for many and this has become an essential part of planning for your future.
Based on a recent cost of care study conducted by John Hancock, for 2022 In-Home Care for just 6 hours each day averages $4,464 per month, Assisted Living averages $4,805 per month, and Nursing Home averages $7,874 per month. This can vary based on where you live and the care providers in your area but these general guidelines definitely illustrate how important it is to make a financial plan for your future.
Allowing your Social Security Benefits to grow as long as possible and pairing those benefits with another lifetime income arrangement like a fixed index annuity, may help you be better prepared to cover costs like this no matter how long you live.
At Summerlin Benefits Consulting, we help clients figure out things like how much income they will need, when to take social security benefits, how to complement those benefits with other lifetime income strategies, and much more.