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Delaying Social Security Provides Insurance Against Outliving Your Money – Part 1

By Jane Young, CFP, EA

As retirement approaches you may be thinking about the right time to start taking Social Security benefits.   Several factors go into this decision including your health, life expectancy, financial situation, and career status.  According to the Social Security Administration, the full retirement age (FRA) is between 66 and 67 for anyone born after 1951 but you can begin taking benefits as early as 62 (age 60 for survivor benefits).  

 Unless you absolutely need your Social Security benefit avoid taking benefits before your FRA.  If you take benefits early you can expect a reduction of up to 30%.  To avoid taking Social Security benefits early consider delaying retirement or working part time.  

Avoid taking benefits while working because a larger portion of your benefit is likely to be taxable.   Up to 85% of your benefit is subject to tax depending on your income.   Additionally, in 2021, if you take benefits before your FRA, while working, you may temporarily lose $1 for every for $2 you earn above $18,960.  

If you are in good health and anticipate a longer life expectancy, you can benefit from waiting till age 70 to take Social Security.  Benefits increase 8% annually for every year you delay taking benefits between your FRA and age 70.  This will provide a benefit that is 24% higher throughout retirement.  There is no advantage to waiting beyond age 70.  

The biggest financial concern for many retirees[JY1]  is outliving their money.  Waiting to take Social Security at 70 provides a form of longevity insurance against this risk.

The break even between taking benefits at your FRA and waiting till age 70 generally occurs around 82 to 83 but depends on your situation and cost of living increases.  If you live a long life, a higher Social Security benefit will help cover expenses later in life and lessen financial stress.

Many investors are resistant to delay benefits if this requires pulling money from their portfolio sooner.  However, it is unlikely that a diversified portfolio will outperform the risk-free annual return of 8% that you receive by delaying your benefit.  

If delaying benefits makes it is necessary to pull money from a retirement account, you are likely taking distributions at a time when your income and tax rate is low.   Distributions from retirement accounts will also reduce your required minimum distributions.

Finally, some are hesitant to delay benefits because they are worried about the future of the Social Security program.  This is fueled by the 2020 report by the Social Security Trustees indicating there is currently only enough money available to pay benefits through 2034 and ongoing taxes are only sufficient to cover 76% of benefits beyond 2034.

This is concerning but congress will likely take measures, similar to those taken in 1983, to mitigate this shortfall before 2034.  Changes made in 1983 included raising the full retirement age, increasing the payroll tax rate, and introducing the taxation of benefits.