Over the past few months, I have met with a significant number of current and prospective clients who have had questions related to or directly pertaining to the best age to claim Social Security retirement benefits. These discussions revealed that there is a fair amount of confusion in the public domain about the best age for claiming Social Security benefits.
It is little wonder that there is so much confusion about Social Security retirement benefits, as there are hundreds of potential retirement benefit claiming strategies available based upon many factors including your marital status, age, and earnings, as well as the age and earnings of your spouse. Compounding the problem of confusion surrounding Social Security benefits is that a great deal of the public domain and internet articles offering advice and best practices information is generated by government agencies and academic researchers who lack real-world experience in helping retirees solve for their retirement income needs with Social Security retirement benefits and other financial solutions.
Despite the myriad of complexities surrounding Social Security, most of the time decisions come down to three basic claiming strategies: claiming benefits early, claiming benefits at full retirement age, or claiming benefits at a delayed age. Let us delve a little deeper into each of the claiming strategies and examine the ramifications of each strategy in addition to exploring scenarios when each strategy may be appropriate.
Social Security Claiming Basics
Before venturing into each of the three benefit claiming strategies for Social Security, it is important that we have a basic understanding of Social Security retirement benefits. For most readers, your Full (normal) Retirement Age is age 66 to 67, depending on your birth year. Once Full Retirement Age is reached, claimants will receive their monthly income benefit outlined in their Social Security benefit statement. Additionally, any earnings received after Full Retirement Age will not reduce benefits, unlike claiming benefits early.
Claiming Social Security benefits early results in a permanent reduction in monthly income benefits. The earliest age for claiming Social Security benefits is 62, which results in a 30% reduction in monthly income benefits. Additionally, recipients who opt to continue working after claiming benefits early face an earnings limitation of $18,960 in 2021 before benefits are reduced by a factor of $1 for each $2 earned above the $18,960 limit.
Recipients can also choose to delay Social Security benefits until age 70. Delaying benefits after Full Retirement Age results in an increase in benefits of 8% for each year beyond Full Retirement Age. This increase means that individuals with a Full Retirement Age of 66 years can earn 32% more in Social Security benefits by delaying until age 70. Likewise, individuals with a Full Retirement Age of 67 years can earn 24% more with the same strategy. Like claiming benefits at Full Retirement Age, earnings will not reduce income benefits.
What the "Experts" Recommend
After reading enough of these articles through the course of their research, many people believe that delaying Social Security income benefits until age 70 is the best, or only, strategy for claiming benefits. It is hard to argue with the logic that you can receive a “guaranteed 8%” increase by delaying benefits until age 72. But is that “guarantee” actually guaranteed?
There are two big concerns that many financial planners have regarding the 8% increase in benefits earned by claiming Social Security at age 70, and both concerns are out of your control to a large extent. The first concern is the health of the Social Security program. While we have been aware of this problem for many years, few politicians seem willing to tackle the issue that Social Security is projected to not be able to pay out promised benefits by the early 2030s. Some projections and estimates forecast benefits being cut by 25% or more at that time if the problem is not addressed soon. If and when that point is reached, it won’t matter whether you have claimed benefits at age 70 or Full Retirement Age, your Social Security benefits will be reduced because the money to pay promised benefits simply won’t be there.
The other concern is the question of how long will you live to collect the increased monthly benefit? For each Social Security benefit recipient there is a breakeven age that you need to reach so that delaying benefits pays off over claiming benefits earlier. Frequently that breakeven age is a decade or more. How confident are you that your health will permit you to reach the breakeven age or beyond?
No "One Size Fits All" Strategy
As is the case with many financial planning and retirement income questions, there is no one best approach or strategy for claiming Social Security benefits for every situation or circumstance. There may, however, be some strategies that are more appropriate for your specific situation and circumstances.
In a perfect world where you have an occupation that permits you to work as long as you wish, your physical and mental health are good, and you have adequate income to meet all your living expenses, then delaying Social Security benefits until age 70 may very well be the best option for you. For that to be your best option, however, an awful lot of things must work out right. The reality is that we do not observe that situation happening very frequently. When this occurs, we should ask ourselves “does it make sense to spend my own nest egg until I can claim Social Benefits at Full Retirement Age or delay benefits even longer until age 70?” The answer may very well be no in many cases.
It is important to be educated about financial matters. It is equally important to understand that blanket advice and recommendations offered without context can cause more harm than good. It is always in your best interests to consult with a Certified Financial Planner™ who can apply his or her years of experience and wisdom to your specific financial situation in crafting the optimal solution to your financial needs.