The Big Social Security Question: When Should You Apply for Benefits?

As much as people want a set formula or equation, there is no one single answer. The key: look at the bigger retirement picture and be fully informed before making a decision.

There’s a refreshingly realistic approach in Kiplinger’s recent article, “The Biggest Social Security Mistake You Can Make,” which says that taking benefits too early is not the biggest mistake that people make. It’s making a decision, without considering other factors.

Individuals can claim their Social Security retirement benefits as early as age 62 (and get a reduced benefit) or wait and receive a larger benefit. At 70, the maximum benefit is reached, which is about 75% greater than the early benefit at age 62. It’s not hard to do the math to find the break-even point or the age at which total Social Security income received from starting benefits at two different ages is the same.

However, the problem is that you’re looking at Social Security in a vacuum. The average retirement age in the U.S. is age 63, according to the U.S. Census Bureau. If you retire before 70 and delay taking your benefits, how are you going to make up for this lost income during those years? Well, you’ll probably spend down your savings at a faster rate, possibly eating a bigger hole in your principal.

Delaying Social Security makes most sense for those who are healthy, still working and looking to replace as much of their earned income as possible. In addition, it would be a greater survivor benefit to a spouse. Some people can also lower their taxes in retirement, by delaying Social Security and tapping their retirement accounts. That would reduce their required minimum distributions (RMDs) and their taxes. However, it’s rare when the amount in taxes you can save in your later years, outweighs the taxes you’ll pay beforehand. Hence, this strategy should be considered only with the help of a legal professional.

You should consider your entire financial picture. This is because each source of income has its advantages. For example, with your personal savings, you have more control and flexibility over your savings than Social Security. With your savings, if you need more or less income, you have the ability to make an adjustment. However, once you take Social Security, you can’t voluntarily adjust the size of your benefit. Other than a spousal or survivor benefit, you can’t name beneficiaries on your Social Security benefit or leave a legacy. With any investment account, you can pass it on to a spouse, other family members, friends or charities.

You’ll want to make the most out of all your resources to reach financial goals and increase your flexibility, to prepare for the bumps that invariably come along during retirement. Remember that you don’t have to take Social Security at any of the usual milestones. Instead, consider how all your assets work together, including pension plans, investment accounts and any other income sources. Social Security benefits should be part of a holistic approach to retirement finances.

Reference: Kiplinger (June 4, 2018) “The Biggest Social Security Mistake You Can Make”