One of my friends emailed me recently. She’s been going through her financial plan in tremendous detail, dotting every “i” and crossing every “t”. Though it is still far in the future, she’s looking at her Social Security benefit.
She had a very simple question that, hopefully, we’ll all face someday… should we elect to take Social Security early or late? She put it in much more direct terms, “Why would someone wait to collect Social Security?!?!”
I’ve read time and again that if you are healthy waiting to collect Social Security is the smart plan. Since I’m only 38, I haven’t put much time into investigating it. However, knowing how smart she is, I knew that she must be onto something and it warranted a look.
Social Security’s Benefit Changes
Currently, the age of Social Security eligibility is 62. If you decide to take payments then, you get less of a benefit than if you took it as the typical age of 66. Conversely, if you wait until 70 to take benefits, you’ll get a larger benefit.
It appears that there’s a sliding scale on how much of a “penalty” or “bonus” you receive of 7% per year. However, even this seems to change depending when you are born. For sake of this exercise, I’ll presume that 7% number I read everywhere is accurate. If your predicted retirement age is 66, then waiting until 70 gives you a whopping 131% of your benefit for the rest of your life. Alternatively if you take it as early as possible you’ll only get around 75% of your benefit.
Sounds like a no-brainer to wait, right? Who doesn’t want 131% of their benefit instead of just 75% of their benefit every year for the rest of their life?
I prepared an email to my friend saying exactly that… and then I decided I’d back it up with a spreadsheet. However, when I created the spreadsheet, I found something very surprising… she may just have a point.
Conceptually, if she takes her benefit at age 62 and invests at 7%, it is essentially the same as if she took the benefit later. The catch is that she has to leave it there, year after year for it to be the same as if she chose to take the benefit later. She is very focused on investing and is the type who may very well make 8-9% with a well-diversified portfolio.
My friend has a another factor that makes taking the money more appealing. She’s had health problems in the past, but hopefully they are behind her. If they come back, it’s better for her to get as much of the money she can while alive, right? It does little good to collect Social Security at age 70 and die at age 72. It would have been much better if she collected money for 10 years, and worked it into her estate plan.
Sometimes what seems to be the best choice isn’t necessarily the case.
Update: A friend pointed me to this great article on the topic where the notable quote was: “They’re [the federal government is] hoping you’re gonna wait. And they’re hoping you’re gonna die.”