One of the most common questions when planning for retirement is, “When should I start taking Social Security?”
Should you start Social Security as early as age 62, letting your individual retirement account (IRA) continue to grow tax-deferred, or should you start drawing from the IRA earlier, and wait for a larger Social Security benefit at age 67 or even 70?
Let’s look at both arguments:
Starting Social Security earlier
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For many people who retire early, taking Social Security at age 62 isn’t an option – it’s a necessity to pay the bills. Others take it early using the “bird in the hand” philosophy, rationalizing that, once Social Security starts, they can’t take it away. And with all the talk in Congress about balancing the federal budget, it’s likely that some day Social Security benefits will be affected – we just can’t say when or by how much.
Probably the most compelling argument in favor of starting Social Security earlier is the idea of preserving liquid assets, such as IRA accounts, for unforeseen needs in retirement. For example, according to www.longtermcare.gov, someone turning 65 today has almost a 70 percent chance of needing some type of long-term care services in their remaining years. Women need care longer (3.7 years) than men (2.2 years).
And yet, while our firm recommends insurance for this risk, it’s estimated that 80 percent of the retiree population doesn’t have this type of coverage. So that IRA money that isn’t spent early in retirement could be available for long-term care and other health care expenses later on.
Delaying Social Security until later
By taking Social Security early, many retirees delay taking IRA distributions until they have to, at age 70½. By then, if there is growth in the account, the tax burden to withdraw will be higher. Plus, if a retiree withdraws from his/her IRA right after starting Social Security early, those taxable withdrawals could affect how much of the Social Security benefit is taxed. Delaying Social Security benefits and taking larger IRA withdrawals earlier may result in lower lifetime taxes.
Most importantly, Social Security increases the monthly benefit by 8 percent for every year that benefits are delayed. That’s a rate of return hard to find with most traditional investments these days. Social Security provides lifelong cash flow, with cost of living adjustments along the way. With people living longer and the threat of inflation over time, it might make sense to wait for that bigger benefit.
Breaking down numbers
When considering when to take Social Security, it’s good to run a break-even analysis. For example, a retiree who receives $1,500 a month at age 62 would collect $2,640 a month (without inflation adjustments) by waiting to age 70, the latest date to start taking benefits
That retiree would sacrifice $144,000 in Social Security checks while waiting until age 70. You would have to live past age 80 to make the cost of waiting pay for itself. If family longevity is on your side, that could be a wise decision.
As always, it’s best to address this issue with a financial planner well in advance of retiring to figure out what works best for you.
Karin Grablin, CPA, is with SRQ Wealth Management, 1819 Main Street, Suite 905 in Sarasota (941-556-9004 and firstname.lastname@example.org) and is a registered representative and investment advisory representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.