As mentioned several times in this book, there are three times at which to claim your benefits:
We’ve also suggested a number of times that in general it’s a bad idea to take your benefits early. The reason is that if you wait, the size of your benefit will grow. If you start collecting benefits at age sixty-two, you could be cheating yourself out of a substantial amount of money. That said, an article in news magazine U.S. News & World Report commented that age sixty-two continues to be the most popular age at which to take benefits:
Some 45 percent of men born in 1943 and 1944 signed up for retirement benefits at age 62, down from 50 percent of people born between 1938 and 1942, and a peak of 57 percent of men born between 1930 and 1934, according to a 2013 Urban Institute analysis of U.S. Census Bureau data. The share of women claiming Social Security benefits at age 62 has also declined over the past decade, but women continue to be more likely to claim early than men. Half of women born in 1943 or 1944 claimed at age 62, compared with 60 percent of those born between 1935 and 1937.
For example, let’s take Wilson, who was born in 1954. He’s single, and based on his family history and his personal habits—he’s a nonsmoker, a moderate drinker, and exercises during the week and on weekends—his life expectancy is somewhere around eight-five.
Wilson’s always had a dream of starting a small business; he’d like to open a used bookstore to serve the small town in which he lives and the surrounding communities. He intends to use a good chunk of his savings to launch the business, but he sees his Social Security benefit as providing enough for his everyday expenses. He has some investments that he’s counting on to produce good returns. And, of course, once the bookstore starts to turn a profit he’ll have that income as well.
With this in mind, Wilson examines his Social Security statement and finds that his monthly benefit will be $1,429 a month or $17,148 a year. That seems a bit low, but Wilson figures that with some penny pinching, he can get along. He files for benefits on his sixty-second birthday and gets down to starting to put his dream in action: finding storefront space, acquiring stock, and so on.
As it happens, a number of things go wrong: Wilson finds that rental space for the store is substantially more than he estimated. Moreover, marketing his business takes a great deal of his time and energy, and to top it off, the economy slows down: his investments stagnate and his business lags. Worry and overwork combine to necessitate a hospital stay that runs up more than $100,000 in medical bills. Increasingly reliant on his Social Security benefit, he realizes it’s inadequate to cover his expenses, and he begins the painfully slow process of job searching. His dream of a happy and productive retirement turns out to be just that: a dream.
What would have happened if Wilson had waited four more years until reaching his full retirement age? His benefit would have been $2,006 a month, or $24,072 a year, $6,924 more per year than his current benefit.
Assuming that Wilson lives to his estimated age of eighty-five, with his current benefit, he’ll accumulate $394,404 over the rest of his life. This sounds like a lot of money, but if he had waited until reaching his full retirement age, that sum would have become $457,368.
But there’s a third alternative. Wilson could wait until he turns seventy to take his benefits. This will mean fewer years of retirement, of course, but the reward can be financial security.
If Wilson waits until he turns seventy to claim Social Security benefits, his monthly benefit will amount to $2,787 a month or $33,444 a year. Assuming he lives to age eighty-five, he’ll collect a total of $501,660. By waiting until age seventy, Wilson will increase his payout from Social Security by more than $100,000.
One argument for taking early benefits is that you can invest all or a portion of the money and reap excellent returns. This assumes two things: first that you have another source of income that you can live on while your money is invested (at least until those investments start to pay dividends), and second that you know how to invest wisely. Both those assumptions are questionable. Many people make poor investing decisions, and the markets can turn quickly (remember the 2008 market crash, anyone?). Leaving your money in the Social Security system is a far safer way of planning for the future.
The key in all this, you’ll notice, is the issue of how long you’re likely to live. The life expectancy table we showed in the chapter Your Full Retirement Age can help you estimate this, but there are some other things you should take into consideration.
Consider all of these factors when you’re deciding whether to take your Social Security benefits early.
Despite the fact that the overwhelming majority of financial experts urge you to hold off taking benefits until you reach your full retirement age (and, if possible, until you reach age seventy), there are some exceptions to taking them earlier.
In keeping with its often-contrarian character, the financial advisory service the Motley Fool writes in a January 2016 column that it makes sense to take benefits early. They quote the U.S. Government Accountability Office to this effect: “The Social Security benefit formula adjusts monthly payments so that someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim.” Therefore, write the folks at the Fool, “If you can wait to take Social Security benefits, that's great. Go ahead and do so. But if you can’t or don’t want to, then there’s no reason to second-guess your decision to take them early.”
Americans have very bad savings habits. A survey in 2014, taken in conjunction with the annual America Saves Week, found that 51 percent of Americans had a specific savings goal, and only 35 percent felt they were making good progress in meeting that goal. The upshot is that many people reach the age at which they want to retire and rely on Social Security, even a reduced benefit, to pay the bills. This is particularly true for people who are finding it increasingly difficult to stay on the job.
If, after looking at charts and figures, you conclude that you’re unlikely to live much beyond seventy, it doesn’t make much sense to wait until seventy to take your benefits. Of course, you might wait until reaching your full retirement age, but you may wish to have as long a retirement as possible. In that case, claiming early benefits is probably the right thing to do.
Finally, it’s worth pointing out that sixty-two is by far the most popular age at which to claim benefits. So even though it usually makes more financial sense to wait, the majority of retirees want their money as soon as possible.