Did you know you have an eight-year period, starting at age 62, in which you can sign up for Social Security benefits, and that the time you begin to claim benefits affects your monthly payment amounts? Not waiting until the end of that period and thereby maximizing your monthly payments is often seen as a critical mistake, since the payments continue indefinitely and incur periodic cost-of-living adjustments. The increases in payout have a larger impact on higher payments. However, waiting until age 70 is not always possible for everyone and, furthermore, may not always make the most sense.
The argument about delaying Social Security claims is certainly a good one. The ultimately monthly payment will be more than 30 percent higher for people claiming after 70 compared to people who take the benefit at 66, which is considered full retirement age. Foregoing the four years of payment between 66 and 70 makes good financial sense as long as individuals live into their early 80s, at which point they will break even. With these statistics, the majority of people will benefit from delaying their benefits, but of course, not all individuals will.
The following are three situations in which delaying payments may not make financial sense.
1. Shortened life expectancy
As explained above, you will break even in your delay of benefits in your early 80s. One of the primary reasons to claim Social Security benefits early is a shortened life expectancy. Individuals who do not expect to live into their 80s because of failing health may want to consider claiming their benefits early, especially if they may need assistance covering healthcare costs. While its ideal to get several forms of insurance to help cover healthcare costs as retirement nears, it’s not always feasible.
Realistically, the government asks people to do a risk-benefit analysis in terms of when they start claiming Social Security since the benefit lasts a lifetime. When you delay your payments, you are betting that you will live in good health long enough to make this delay worthwhile. While this is certainly true for many, it is not a given, so you will need to think about your individual situation. The other thing to consider, however, is the spousal benefit. Survivor benefits will also be lower if you claim early, so it can still make sense to delay as long as possible, even when you are in poor health.
2. Upfront financial need
Some people simply need more money in their early retirement years. This is a time when people have more energy and limited health issues, so they are more apt to travel, take up hobbies, and do other things that cost money. This often translates to the need for more cash flow in the early years of retirement than they had planned.
The corollary of this is that individuals will likely spend less money down the road as they get older and slow down, although it is important to note that the cost of living will increase over time and drive expenses over the long run.
Those who think they fall into this category may prefer to increase cash flow in their early retirement years with Social Security payments and accept that their income from this source will simply be lower. This may not prove to be as big of an issue down the road as your cash needs diminish, but you should accept that you may end up needing to make some sacrifices to make ends meet, especially if you do not have a lot saved outside of Social Security. You should not put yourself at risk of bankruptcy.
3. High risk tolerance
Another situation in which you may claim your Social Security benefit early is when you want to invest the money aggressively. When you delay your claim, you gain an increase in monthly payouts of 8 percent per year, up to age 70. Savvy investors may feel like they can get a high return with that money and prefer to invest the difference rather than wait for a higher payment down the line. If you think you could secure a return higher than 8 percent on the money you get from Social Security, this strategy can make sense—provided that you accept the added risk.
Ultimately, no one has a crystal ball when it comes to predicting the market. If you wish to bet your Social Security against the market, only do so if you already have significant savings and can support yourself without needing Social Security at all, especially given the risk that you could lose all of the money in a bad year. Typically, investors get much more conservative as they get closer to retirement, so this strategy is really only acceptable for people with a high tolerance for risk or who have other sources of income.