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Advantages from Delaying Social Security Benefits
The full retirement age for Social Security benefits currently ranges from age 66 to 67, depending on when the person was born. But in 2021, 29% of those who claimed their Social Security benefits were age 62, and 57% were younger than 66. Only 14% were over age 67 when they started their Social Security benefits, despite the monthly benefit increasing 8% for each year that the benefits are delayed past full retirement age, until age 70.
There are significant consequences resulting from when one claims Social Security benefits, and while starting benefits early can make sense in some situations, it is generally better to delay claiming one's benefit at least until full retirement age and often later. There are three primary reasons for this, which are outlined below.
1. Delaying Social Security benefits increases them significantly once they begin.
Those who earned $71,000, the median household income in 2021, for at least 35 years would have a monthly Social Security benefit of $1,263 if they started their benefit at age 62. But if they waited until age 67, their monthly benefit would be $1,938 (in today's dollars). And if they waited until age 70, their monthly benefit would be $2,285, an 81% increase over the monthly benefit if benefits were started at age 62.
For over 60% of those who receive Social Security benefits, those benefits comprise more than half their total income. Considering that Social Security benefits are an integral part of most retirees' finances, increasing them by delaying them can be very prudent.
2. Delaying Social Security benefits provides for greater 'longevity insurance'
According to 2019 data from the Social Security Administration, there is over a 50% probability that at least one of two spouses age 66 will survive to age 90, a 27% probability that at least one will survive to age 94, and nearly a 10% probability that at least one will survive to age 98. These probabilities are not tiny, and living to such an advanced age may greatly strain retirees' finances.
Social Security benefits are the only guaranteed (by the U.S. government) source of inflation-adjusted, lifetime income available to most retirees. Pensions have become increasingly rare in the private sector, and even most of those in the public sector are not tied to inflation rates. As such, Social Security benefits are much better for funding a long retirement.
Working longer and/or using one's savings and investments for spending needs in order to delay one's Social Security benefit is basically equivalent to 'buying' a bigger benefit and provides greater financial protection in the event that one lives for a long time.
3. Delaying Social Security benefits provides more time for Roth conversions at lower tax rates.
In a prior post, I discussed how marginal tax rates can reach high levels, even for fairly modest income levels, once Social Security benefits begin. As such, it's often not tax efficient to convert large portions of one's tax-deferred accounts to Roth accounts once Social Security benefits begin. Delaying Social Security benefits can give investors more time to do Roth conversions at lower marginal tax rates, which can be very beneficial both to them and their heirs, who will not have to pay income taxes on the inherited Roth funds.
Then Why Do Most Retirees Claim their Social Security Benefits Early?
Given that there are substantial benefits to delaying Social Security benefits, it may be puzzling as to why the majority of those claiming them do so before their full retirement age. Below are the most frequent reasons for claiming benefits early.
1. Concern that Social Security benefits might be reduced or eliminated
In the Social Security trustees' 2022 annual report, they estimate that the program's cash reserves will be exhausted by 2035, and under current law, the program could only then pay in benefits an amount equal to what it will be taking in via payroll taxes. Unless the law is changed, it's currently estimated that the benefits paid would be reduced by approximately 20%.
Though a 20% reduction in benefits would certainly be very hard on many who are dependent on those benefits, it would be a very far cry from the Social Security program itself being eliminated.
While trying to determine what the U.S. Congress will do with Social Security in the future is a fool's errand, most pundits seem to agree that a 20% reduction in all benefits would be very unpalpable from a political standpoint. A reduction could be avoided entirely through increasing the maximum earnings subject to the Social Security tax, increasing the tax rate, pushing back the full retirement age, or some combination of all these options. Each of these are more plausible than a significant reduction in benefits.
Regardless, starting one's Social Security benefits out of fear that they will suddenly vanish or be drastically reduced is not a good idea.
2. Concern that they will die before reaching a Social Security 'break even age'
Some claim that they want to begin taking their Social Security benefit early because they would be at an advanced age before the higher benefit resulting from delaying would 'break even' with the lower benefit resulting from starting the benefit early.
But this logic is flawed, at least in most instances. If you die before reaching a 'break even' age but still had enough money to fund your retirement, then your financial plan succeeded. It is irrelevant that you could have had more money, money which you did not truly need, by starting your Social Security benefit early, especially since none of us knows when we will die. But if you live a long time, then your plan for funding your retirement could be seriously challenged, and having the biggest Social Security benefit possible would certainly help.
That said, if you have a solid reason to believe that you will die before about age 80, then taking Social Security benefits early makes more sense. Note that the longevity of your family members does not qualify as a 'solid reason' since research has shown that the longevity of family members only accounts for about 25% of the differences in one's own longevity. The rest is explained by one's own health, lifestyle, and unknown factors.
3. Need Social Security benefits immediately
Many begin taking Social Security benefits early simply because they need the funds now. It's estimated that around 30% of retirements are involuntary, the most common reasons for which are a job loss, the retiree's own poor health, or the poor health of a spouse or other family member. Such people may not have the means to delay Social Security benefits.
4. Attempt to earn a higher return elsewhere
A few folks start their Social Security benefits early in the hopes that they can invest the funds and earn a higher return on the funds than they would achieve by delaying their benefits. This can make some sense for those whose plan for funding their retirement does not hinge on their Social Security benefits (i.e., they have a very well funded retirement), but it entails risk and is not appropriate for most retirees. Recall that Social Security benefits represent the majority of most beneficiaries' income, and such people should not put so much of their retirement income into unnecessary jeopardy.
Final Thoughts
Delaying Social Security benefits increases their amount, provides for greater 'longevity insurance', and allows more time to make Roth conversions at lower tax rates, though this might not be optimal for those expecting to pass away at a relatively early age or those who need to begin their benefit right away. Regardless, careful consideration should be taken before deciding what to do or, rather, when to do it.
