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3 Temptations to Take Social Security Early, and Why Patience Pays Off

Last updated 03/6/2024 • By Jason Siperstein, CFA, CFP®, RMA®

When to Claim Social Security

Many people decide to take their Social Security benefits early. It’s not hard to see why – between the buzz in the media and the horror stories shared by friends, there’s a whole mix of factors influencing this decision.

In this post, we break down three common reasons people opt for early Social Security… and give some insight into why it might not be the smartest move!

Many people decide to take their Social Security benefits early. It’s not hard to see why – between the buzz in the media and the horror stories shared by friends, there’s a whole mix of factors influencing this decision.

In this post, we break down three common reasons people opt for early Social Security… and give some insight into why it might not be the smartest move!

1. “It’s not going to be around for much longer.”

From 1935 to 2010, Social Security found itself in an great spot, consistently collecting more in taxes than it paid out. This surplus was carefully tucked away into a trust fund, blossoming as the years rolled on. But as we crossed into 2011, the tides turned dramatically.

The once-stable era of financial surplus had been replaced by a challenging period of deficits, reshaping the fiscal foundation of Social Security. Just last year, projections showed that by 2034—merely a decade away—the trust fund could be fully exhausted. Each year, that horizon seems to inch ever closer, sparking urgent conversations about the future of Social Security. 

Social Security – Now or Later
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When Social Security was first established in 1935, conditions were ripe for the trust fund to grow:

 

In 2010, Social Security started running at a consistent deficit because conditions changed:

 

And the trend keeps getting worse, but this does not mean that Social Security will go away! It will still collect taxes from the workers paying into the system. And if nothing is changed, Social Security should still be able to fund 78% of benefits from taxes alone.

The math to bridge the coverage gap from 78% to 100% is not complicated and changes will be made. But like anything else in Washington, my guess is that it will come down to the wire (around 2034 when the trust fund is almost depleted). CNBC put out a good article showing potential solutions and their popularity.

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OUR TAKE: If you are in your early to mid-60s, we don’t think you need to worry about how Washington fixes Social Security. We think you will be grandfathered into current rules. It will be the younger and/or high-income (not retired) folks that will be most impacted.

2. “I want the income now.”

We hear you loud and clear! You worked your whole life for those benefits and deserve to enjoy them. However, I would recommend taking that income from your investment portfolio instead of claiming early (assuming this is sustainable).

Deciding when to take benefits will have a permanent impact on the benefit you receive. Claiming before Full Retirement Age (FRA) can significantly reduce that benefit (up to 30% decrease) whereas claiming after, significantly increases it (up to 32% increase). 

Occasionally, we hear someone say: “but taking income (early) from Social Security will let my portfolio grow, which would offset the reduction in Social Security benefits.” However, for this to be true, you would need to earn a consistent return of 7% to 8% from your portfolio. Earning that 7% to 8% return is not guaranteed – especially because you may wish to reduce portfolio risk as you age.

We hear you loud and clear! You worked your whole life for those benefits and deserve to enjoy them. However, I would recommend taking that income from your investment portfolio instead of claiming early (assuming this is sustainable).

Deciding when to take benefits will have a permanent impact on the benefit you receive. Claiming before Full Retirement Age (FRA) can significantly reduce that benefit (up to 30% decrease) whereas claiming after, significantly increases it (up to 32% increase). 

Occasionally, we hear someone say: “but taking income (early) from Social Security will let my portfolio grow, which would offset the reduction in Social Security benefits.” However, for this to be true, you would need to earn a consistent return of 7% to 8% from your portfolio. Earning that 7% to 8% return is not guaranteed – especially because you may wish to reduce portfolio risk as you age.

To provide some context, a portfolio of moderate risk (60% stocks and 40% bonds) produced a 6.4% annualized return from 2001-2020 according to J.P. Morgan. This is lower than the 7-8% needed to compensate from taking Social Security early. Also, keep in mind that most economists are predicting lower returns in the future.

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OUR TAKE: Take the “income” from your investment portfolio to let Social Security benefits increase to their maximum amount. This way you can enjoy the extra spending while giving yourself the best shot of maximizing lifetime Social Security income.

3. “I don’t know how long I am going to live.”

This is the third most common reason people claim early. The thinking goes like this, “If I die early, at least I would have gotten something instead of waiting.”

However, for a married couple, there is a 50% chance that at least one person makes it to 90 years old. And you don’t even need to make it to 90 for claiming later to be worth it. Take a look below:

This is the third most common reason people claim early. The thinking goes like this, “If I die early, at least I would have gotten something instead of waiting.”

However, for a married couple, there is a 50% chance that at least one person makes it to 90 years old. And you don’t even need to make it to 90 for claiming later to be worth it. Take a look below:

Of course, these stats apply to the general population and are not specific to you. Given the life’s uncertainty, making the best decision requires operating without complete information. For our clients, we start with average longevity as a baseline. From there, we tailor these percentages to fit your distinct profile. 

Deciding the right time to claim Social Security benefits involves balancing a host of considerations. If you find yourself struggling with this decision, it’s wise to consult an expert. For additional logistical insights, I recommend consulting the guide available on Caring.com.

By Jason Siperstein, CFA, CFP®, RMA®

Jason Siperstein is a fee-only financial planner that specializes in retirement planning. He is based in Rhode Island and serves clients locally and across the country. Jason is called on by local and national news to share his insights.

Social Security

There are a lot of reasons why people choose to claim Social Security early. From the media to friends, people are bombarded with lots of concerns.

In this post, we outline 3 of the most popular reasons why people take Social Security early…AND attempt to explain why they shouldn’t!

1. “It’s not going to be around for much longer.”

We hear this reason often and it comes as no surprise. In 2022, Social Security estimated that its trust fund will be depleted by 2035. That is only 13 years away and seems to be moving closer every year. Though, this does not mean that Social Security will vanish.

From 1935 until 2010, Social Security collected more in taxes than it paid out to beneficiaries. Social Security put these surplus dollars in a trust fund, and it grew each year.

When Social Security was first established in 1935, conditions were ripe for the trust fund to grow:

  • There were 150 workers for every 1 retiree. Put another way, 150 workers were paying into Social Security for every 1 person receiving benefits.
  • The average 65-year-old lived until 74.
  • The official retirement age to collect Social Security benefits was 65.

In 2010, Social Security started running at a consistent deficit because conditions changed:

  • There were 9 workers for every 1 retiree – a huge decrease.
  • The average 65-year-old lived until 85 – an 11 year increase in life expectancy.
  • The official retirement age to collect benefits was still 65 – it hadn’t moved despite the difference in worker-to-retiree ratio AND longer life expectancy.

And the trend keeps getting worse, but this does not mean that Social Security will go away!

It will still collect taxes from the workers paying into the system. And if nothing is changed, Social Security should still be able to fund 78% of benefits from taxes alone.

And the math to bridge the coverage gap from 78% to 100% is not complicated and changes will be made. But like anything else in Washington, my guess is that it will come down to the wire (around 2034 when the trust fund is almost depleted). CNBC put out a good article showing potential solutions and their popularity.

[chat-owl text=”OUR TAKE: If you are in your early to mid-60s, we don’t think you need to worry about how Washington fixes Social Security. We think you will be grandfathered into current rules. It will be the younger and/or high-income (not retired) folks that will be most impacted.”]

2. “I want the income now.”

We hear you loud and clear! You worked your whole life for those benefits and deserve to enjoy them. However, I would recommend taking that income from your investment portfolio instead of claiming early (assuming this is sustainable).

Deciding when to take benefits will have a permanent impact on the benefit you receive. Claiming before Full Retirement Age (FRA) can significantly reduce that benefit (up to 30% decrease) whereas claiming after, significantly increases it (up to 32% increase). FRA refers to the age when you are entitled to 100% of your benefit.

Occasionally, we hear someone say, “but taking income (early) from Social Security will let my portfolio grow, which would offset the reduction in Social Security benefits.”

However, for it to offset the permanent reduction in Social Security, you would need to earn a consistent annual return of 7% to 8% from your portfolio (assuming you live until 90). Earning a 7% to 8% return is difficult – especially because you should not have an aggressive portfolio in your later years.

To provide some context, a portfolio of moderate risk (60% stocks and 40% bonds) produced a 6.4% annualized return from 2001-2020 according to J.P. Morgan. This is lower than the 7-8% needed to compensate from taking Social Security early. Also, keep in mind that most economists are predicting lower returns in the future.

[chat-owl text=”OUR TAKE: This just requires a mindset shift. Take the “income” from your investment portfolio to let Social Security benefits increase to their maximum amount. This way you can enjoy the extra spending while giving yourself the best shot of maximizing lifetime Social Security income.”]

3. “I don’t know how long I am going to live.”

This is the third most common reason people claim early. The thinking goes like this, “If I die early, at least I would have gotten something instead of waiting.”

However, unless you have a medical condition, there is a 50% chance that at least one person in a couple lives until 90 years old!  And you don’t even need to make it to 90 for claiming later to be worth it:

  • Age 77: If you make it to 77, you are better off claiming at FRA vs. age 62. There is a 94% chance that at least one person in a couple lives until 77.
  • Age 81: If you make it to 81, you are better off claiming at age 70 vs. FRA. There is an 86% chance that at least one person in a couple lives until 81.

Of course, these percentage are of the general population for married people. You can adjust these percentages based on your own health status, family history of longevity, and marital status.

[chat-owl text=”OUR TAKE: Since you don’t know how long you have, you need to make the best decision without all information. We believe the best way to do this is by looking at the average longevity statistics and tweaking those percentages according to your unique profile.”]

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