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A Sensible Look at Social Security

“As people approach the age of 60, many of them start thinking about how and when to access their Social Security benefits. The basic rule is that you can start to receive Social Security as early as age 62 or you can delay taking benefits until age 70.”

If it seems like there are too many different recommendations on when to start taking Social Security, you are right. Every week brings another theory of when to take benefits, when spouses should take benefits, or news about Social Security’s trust fund drying up. The recent article from The Denver Post asks “Road to Retirement: When should you start taking Social Security?” This article breaks down the choices and explains what’s really at stake.

The general rule is that for each year you wait after age 62, benefit payments increase by about 6% to 8%. The adjustment depends upon whether you start before or after your “normal retirement date,” which today is 66 for people born between 1943–1954. The Social Security Administration website gives all the estimates for you when you take benefits from age 62 to 70. The longer you wait, the higher your benefit. However, if you wait, you’ll receive benefits for a shorter period of time.

How can you make sure you’re getting everything you’re entitled to? Unless you know when you are going to die, you really can’t. However, on paper, it doesn’t matter that much. Social Security’s actuaries have done the numbers. On average, the benefit payment options are designed to be actuarially equivalent, regardless when you start taking benefits.

If you took a group of 10,000 retirees and analyzed all of their choices, some taking benefits early, others taking benefits late, they would all receive about the same benefits. Some of those who took benefits early will die early. Some who wait will die without ever taking any benefits. Those who wait until age 70 and live until 100, will get more than projected.

Determining which is best, is dependent upon when you die. Unless you have a crystal ball, there’s no way to know whether taking benefits earlier or later will be best for you.

A better approach: consider what risks you are more concerned about and select the strategy that helps to minimize that risk.

If you are worried about living a long time and running out of money, then your best bet is to wait until age 70. You’ll receive about 30% more than if you take benefits at age 66. If you live to 100, then your benefits will come in as long as you are living.

What if you are worried that Congress is going to let Social Security die or change the rules? If that’s your main concern, then you would want to take benefits earlier. That way if benefit formulas change, you’ll know that you got the most you could before the rules changed.

What if you retired at age 63 and a year after that, the markets tanked? Your retirement accounts took a hit and your cash flow is tighter than you anticipated. Social Security benefits could give you the option of taking less from your retirement accounts, while giving the market and your accounts a chance to recover.

What if you are healthy and well and want to enjoy your life to the fullest while you can, including travelling and doing whatever you want while you are well? Then taking your Social Security benefits early makes sense, because you’ll have more income in the earlier part of your retirement.

As you can see, there’s no one right answer for everyone when it comes to taking Social Security benefits early. However, there is one right answer for each person, depending on their lifestyle, retirement account size and personal health.

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