The Social Security full retirement age (FRA) was 65 for many years. In 1983, Congress passed a law to gradually raise the age because of the changes in modern medicine and people’s longevity. The full retirement age increased gradually by a few months for every birth year until it hit age 67 for those born in 1960 or later.
Social Security is a complicated system in which all American taxpayers participate. Taking benefits early can be tempting, but it could have long-lasting impacts on your financial independence.
1. Predictable Income: Employers with pension plans are becoming more and more scarce. The Revenue Act of 1978, which introduced the modern 401(k), changed how people and companies save for their employees’ retirement. Prior to these changes, many large corporations and hospital systems provided a pension program for their workforce, which had a projected future monthly income benefit. Today, employees are on the hook for their own savings, meaning many have under-saved for retirement. Because of this, filing for Social Security early for many can be advantageous. Social Security provides a predictable source of income to help make debt payments, pay bills, and maintain lifestyle expenses. Therefore, if you plan to retire early, you might be forced to start taking Social Security retirement benefits early, and it may not be a bad idea.
2. Other Savings: Filing for Social Security retirement benefits could be advantageous for you by taking pressure off your other retirement assets. If you start taking your predictable Social Security benefits early, it will reduce or alleviate the need to dip into your other savings to support your monthly bills. Therefore, filing early can benefit the rest of your portfolio by reducing pressure on your rate of distribution.
3. Life Expectancy: With life expectancy hovering around the age of 77 nowadays, this can play a pivotal role in deciding when to file for Social Security benefits. For those with shorter life expectancies because of medical diagnoses or procedures, it may be prudent to consider filing for benefits early to take advantage of this income source. In addition, if you are married, consider your spouse’s benefits and survivor benefits and how these may be impacted by your decision to file early.
1. Reduction in Benefits: Social Security retirement benefits can be elected once you’ve attained age 62. The availability of benefits does not mean they should be elected early. If you file early, the Social Security Administration reduces the monthly payment by 5/9th of 1 percent for each month before full retirement age, up to 36 months, and 5/12th of 1 percent for each additional month. For someone with a Full Retirement Age (FRA) of 67, this means their benefits would be reduced by 30% if they filed at age 62.
2. Miss out on guaranteed increases: If you file for Social Security benefits early, you will miss out on the possibility of having your benefits grow at a guaranteed rate of 8% per year. Those who delay benefits from their full retirement age to a future date are entitled to an enhanced benefit payout. For example, if your FRA is age 67 and you file for benefits at age 70, your benefits at age 70 will be 124% of your FRA benefits (8% for three years).
3. COLA Adjustment reduction: As mentioned above, filing early for social security benefits can also imply that your annual cost-of-living adjustment (COLA) will be less impactful than it would have been if you filed at FRA. For instance, someone with an FRA of 67 and a benefit of $3,000 could receive 70% of their benefit amount at age 62 ($2,100). As a result, the annual cost-of-living adjustment will be applied to their $2,100 benefit rather than their $3,000 benefit. Over a 20 or 30-year period, this can be a substantial difference.
4. Survivor benefits could be impacted: Depending on your circumstances, filing for benefits early as the top earner in your relationship will result in a lower survivorship benefit for your spouse. In addition, because survivorship benefits are based on the higher of your two benefit amounts, if the higher earner locks in a lower lifetime benefit by filing at 62, they are also impacting the survivorship benefits their spouse could one day receive.
5. Increasing longevity: Modern medicine is allowing people to live longer. The best way to “beat the system” is by living longer. If you anticipate your life expectancy will exceed age 78 and a half, you’re likely better off waiting until FRA to file for Social Security benefits. That is when your cumulative benefits from claiming at 67 surpass those you’d get by taking benefits at 62.
Determining when to start your Social Security benefits is a complex and personal decision. Many different elements can impact your benefit and choice, and no one situation is the same as the other.
The decision of when to take Social Security largely depends on your age, your spouse’s age, your life expectancy, your spouse’s life expectancy, your benefit amount, your spouse’s benefit amount, and your access to portfolio assets. Each of these variables impacts the decision differently. Even though your monthly benefit will always be higher at age 70, there is no guarantee the lifetime benefit will equal the total benefit if you had begun at an earlier age.
If you are unsure of where to start and how to evaluate the most prudent Social Security option for your situation, schedule a free Social Security consultation now.
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Jordan Bilodeau, CFP®, is a Partner and the Director of Planning & Strategy at Spaugh Dameron Tenny, where he leads firmwide planning initiatives and helps clients navigate complex financial decisions. With experience in portfolio design, tax strategies, and business succession planning, Jordan works with executives, physicians, dentists, and successful retirees to coordinate every aspect of their financial lives. He holds the CERTIFIED FINANCIAL PLANNER® designation and has a Master’s degree in Wealth and Trust Management, providing tailored guidance for clients.
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