By Kelley C. Long, CPA/PFS
March 31, 2022
The decision of when to claim Social Security is a top concern for pre-retirees and for good reason: Claiming too early and locking in a lower payment can prove to be a mistake for people who experience longevity, while delaying in order to secure a higher payment, then meeting an early demise, can leave money on the table.
Statistically speaking, you'll receive roughly the same total dollar amount whether you start claiming at age 62, age 70, or any time in between — that is, assuming you live to the average life expectancy. But for those of us without a crystal ball to predict the exact moment of our death, the decision is multifaceted.
The primary reason people start collecting Social Security early is simply because they need the money. Many others unnecessarily link the idea of stopping working (aka retirement) with claiming their benefits, leading them to claim before they need the money only because they wish to stop working. If you can pay for your retirement expenses from savings for at least a couple of years, then it's worth considering putting off filing for your benefit to lock in a higher monthly payment for life, even if you wish to officially retire from the workforce much earlier.
Let's cover the pros and cons of delaying your benefit to the maximum of age 70.
Pro: You lock in a larger lifetime stream of income. This may be the most obvious reason in favor of delaying, but it goes beyond the higher monthly payment at the beginning. Most people think of the larger starting amount as the sole reason to delay, but that's not the biggest reason — which is that the delay leads to a substantially higher monthly benefit in your 80s and 90s as well.
Pro: Your benefit increases each year you delay, up to 8% per year when you postpone beyond your full retirement age. Show me any other financial product that has a guaranteed 8% annual return these days and I'll ask you to show me your time machine back to the 20th century. Assuming your tax-advantaged retirement savings aren't invested as aggressively as they may have been during your earlier years, you're probably better off spending down savings while letting your Social Security benefit continue to grow.
Pro: Your COLA increases will be larger. Each year the Social Security Administration announces the cost-of-living adjustment (COLA) for all current beneficiaries of the plan. The percentage increase is the same for all beneficiaries, but the actual dollar amount is based upon your benefit.
Using the 2022 increase of 5.9%, a person receiving $1,500 per month will see a bump of $88.50 per month, while someone whose benefit is $2,000 will see a $118 increase. Those increases compound over the years — in other words, delaying Social Security benefits not only allows you to lock in a higher starting amount, the increases over the years are larger as well.
Pro: You can change your mind at any time. Probably the most overlooked fact is that deciding to delay Social Security is not a one-time decision, while claiming your benefit is (unless you want to pay back any benefits you've already received in order to reverse your decision). Once you're eligible, you can claim at any time, so deciding to delay is realistically more of a semiannual decision rather than a once-in-a-lifetime opportunity.
In fact, once you exceed your full retirement age, you can elect to receive up to six months' retroactive benefits in a lump sum. This can help alleviate one of the primary concerns that people have, which is that they might regret delaying Social Security benefits if they experience a health diagnosis or other circumstance that reveals the possibility of a shorter-than-expected lifespan or a need for a large cash infusion.
Pro: Tax diversification. While Social Security becomes taxable once your total income exceeds the annual limit, even at its highest inclusion in taxable income, only 85% of the benefit is taxed. This means that if you delay Social Security while spending down pretax retirement accounts throughout your 60s, you'll likely be reducing your future required minimum distributions (RMDs), which are 100% taxable, and replacing that income in your 70s and beyond with lower-taxed Social Security benefits.
Pro: Health savings account eligibility. While you can spend down any dollars accumulated in a health savings account (HSA) regardless of your health care coverage, once you're enrolled in Medicare, you'll no longer be eligible to contribute further to an HSA even if you're still covered by a qualifying employer-sponsored HSA insurance plan.
And once you begin collecting Social Security, you're automatically enrolled in Medicare upon age 65 and there is no way around this. Once you're covered by Medicare, the HSA rules say you are no longer eligible to contribute to your HSA. Watch out for the six-month lookback, too — for more on this, see Long, "Medicare's Tricky Rules on HSAs After Age 65," 232-1 Journal of Accountancy 38 (July 2021).
Con: The break-even point is typically 12 to 14 years away. A commonly accepted rule of thumb is that it takes between 12 and 14 years to receive the same amount of dollars from delaying your payments that you would have received had you started claiming at age 62. You can calculate your exact break-even age using various calculators online, but basically you need to have reason to believe you'll live at least 12 years beyond your claiming date to justify postponing.
Con: It's not just about the money. Assuming your health status and family history support the expectation that you'll live to be at least 82, and you can afford to put off receiving the monthly payments, delaying your benefit until age 70 could still be a cause of anxiety and fear.
For instance, one big reason people choose to start their payments earlier than mathematically suggested, beyond needing the money, is their concern that the Social Security system may fail along with a desire for the certainty that at least they'll get something out of the system that they've paid into over the years. As long as you've considered all the arguments in favor of delaying and aren't just making an emotional choice, this can be a valid reason to claim earlier.
Con: Health issues and fear of sudden death. If you have health concerns or other good reason to believe you have a shorter-than-average life expectancy, then claiming earlier makes sense. The caveat to thinking that dying early leaves the extra money on the table is when you have a surviving spouse. Assuming your spouse was a lower earner than you and survives you, he or she will continue to receive the higher amount of your benefit, even if you die before claiming.
Con: Stock market fluctuations can cause uncertainty. If you ultimately need to liquidate investments during a down market in order to fill the cash flow gap that your Social Security check would otherwise cover, this can negate the increase in your delayed benefit (recall the "pro" that notes the 8% per year increase in your benefit from delaying). One way to overcome this risk is to ensure that you have moved enough of your retirement savings to cash to fund at least two years, sometimes five years, of the lifestyle expenses you anticipate.
Con: The future of Social Security is uncertain. As noted above, some people claim benefits early because they know that the Social Security system is underfunded with a projected shortfall estimated by the year 2034. While there is no reason to believe that Social Security will go away completely, changes that Congress may make to the program to shore up its financial health could affect what you receive in the future. While most of the proposals to make Social Security solvent have involved higher taxes or reductions in future benefits, there's no guarantee they won't reduce payments to retirees, especially those with higher incomes.
In conclusion, if you can afford to delay receiving benefits and you have reason to believe you'll enjoy a life expectancy well into your 80s or beyond, you'll end up collecting more from the current system if you wait until you reach age 70 than if you claim earlier. Beyond that, remember that it's best to avoid claiming just because you feel like you should. Make sure your decision is an informed one.
— Kelley C. Long, CPA/PFS, CFP®, is a personal financial coach in Tucson, Ariz. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.