Filing for Social Security too early is one of the biggest mistakes that retirees make. While it is tempting to file early to receive a little extra cash a little sooner, taking an early benefit will result in a reduced benefit for the rest of your life. For most retirees it is better to let the portfolio bridge the gap, allowing Social Security to grow. While the final decision should be made within the context of your financial plan and your specific health situation, there are good reasons to wait for many retirees.
You may begin taking social security as early as 62, something known as “Early Retirement”, but there is a catch. When you file for social security this early, you receive a reduced monthly, up to 40% less per year compared to what you would receive at your Full Retirement age. For each year that you wait, your monthly benefit will increase, up to 8% more per year for each year.
Importantly, if you have a spouse who is also eligible for a portion of your benefits, delaying increases not only what you will receive, but also what your spouse will receive as well. A significant portion of the benefit from waiting comes from the “Survivor Benefit”. The longest living spouse in a married couple will receive the higher of the two spouse’s Social Security benefit for life. Despite, the temptation to file early, receiving 40% less in retirement can destroy retirement plans and leave the longer living spouse in destitution.
Life expectancies are rising. The table below shows the life expectancies of reaching 66, 70, 76, 80 and 90. Note that a married couple has an 88% chance that at least one spouse will live to age 80, and a 47% chance that at least one spouse will live to age 90.
Probabilities of Living to At Least Age
Source: Social Security Administration Current Population Survey, J.P. Morgan Asset Management. *Couple assumes at least one lives to the specified age or beyond.
This long life-expectancy is why it makes sense for most people to wait on Social Security. If you have an existing health condition or concerning family history, early filing may make sense. One way to think about Social Security is in terms of a ‘breakeven point’; the point at which waiting begins to result in a greater total benefit. In my experience, the ‘breakeven point’ for filing at Full Retirement Age, compared to filing at age 62, is usually in a person’s late 70s. If you have a good chance of living to your 80’s, and most people do, then waiting is probably your best option. The table below shows the cumulative benefit that retirees are expected to receive based on claim age
Source: Social Security Administration, J.P. Morgan Asset Management. Breakeven assumes the same individual, born in 1957, earns the median individual income, retires at the end of age 61 and claims at 62 & 1 month, 66 & 6 months, and 70, respectively. Benefits are assumed to increase each year based on the Social Security Administration 2018 Trustee’s Report “intermediate estimates (annual benefit increase of 2.7% in 2020 and 2.6% thereafter).
Whatever your situation, it pays to make wise decisions about Social Security in the context of a well thought out plan. If you would like help analyzing your situation, please feel free to give us a call.