04 Nov I’m retired and turning 64. When should I take Social Security?

Q. Should I wait before taking Social Security? My wife and I are retired. She’s 67 and I’m turning 64. Financially, we’re in a good position. I collect a monthly pension of nearly $100,000 a year and our medical benefits are covered. My wife has been collecting Social Security since age 62. Our home is paid for, we have sizable IRAs and a joint brokerage account and we also have long-term care insurance. The pension and Social Security bring us reasonably close to paying for our lifestyle, yet we typically withdraw approximately $30,000 per year from our brokerage. If I take Social Security, we won’t have to take from the brokerage account. My health is good. When is the best time to take the benefit? Also, will I get the higher cost-of-living increase if I delay collecting?
— Trying to decide

A. Deciding when to take Social Security is an important decision that will affect your financial security for the rest of your life, and potentially the life of your spouse.

Congratulations on being financially well-positioned for your retirement.

There’s a lot that goes into deciding when to take Social Security, but here are some basics.

We’ll start with the “when is best?” question.

To that, beauty is in the eye of the beholder, said David Principe, a certified financial planner with SAGEbroadview Wealth Management in Morristown, noting that different people will have different ideas about the definition of “best.”

For you to judge your decision, you need to clear about what you’re expecting from Social Security, he said.

“Would the little voice in the back of your head feel more comfortable if you were to hedge against the worst — early death — by starting to collect sooner than later so at least you got something?” he asked. “Or would that voice really rather you bet on yourself and assume you’ll live past Social Security’s life expectancy, roughly mid-80s, so as to maximize your lifetime benefits?”

Because we can’t “know” whether we made the best decision until after we’ve reached our expiration date, the next best thing is to make a decision over which you’ll lose the least amount of sleep in the interim, Principe said.

“Assess how you feel in those terms — getting `something’ versus maximizing — and then judge your options based from that vantage point,” he said.
Social Security’s annual cost-of-living adjustment does apply to deferred benefits in years when there is a COLA, Principe said.

“Each year when COLA occurs, Social Security recalculates your full retirement benefit — also known as your Primary Insurance Amount, or PIA — which in turn is what your deferred benefit will be based on,” he said. “COLA is tied to inflation and can be as low as 0%, as we saw back in 2009, 2010 and 2015. For 2023, it will be 8.7%.”

As for the deferred benefit itself, for every month between your full retirement age (FRA) and age 70 that you delay starting Social Security, your benefit increases by 0.67%, or 8% annually, Principe said. In investment terms, this is a “return” you’d be hard to guarantee year-in and year-out in your brokerage account, so it shouldn’t be overlooked regarding your Social Security benefit, he said.

This doesn’t apply to you, but if someone begins Social Security benefits before the full retirement age, it will be reduced, he said.

“The reduction formula is different than the deferred benefit formula – you can see details for your specific situation on your Social Security statement. However, there are calculators online that can help you understand the general impact of starting early,” he said.

To bring all of this together, Principe offered this example.

Say you were born in November 1957 and are 65 years old. Your full retirement age for Social Security is 66 and 6 months, and say your current FRA benefit is $1,000 per month. Then assume COLA averages 3% every year between now and age 70.

If you start your benefit now, it will be $900 per month, reduced slightly for having started before full retirement age. Next year the COLA will increase your benefit to $927 a month, he said.

If instead you wait for your full retirement age at 66 and six months in April 2024, then your benefit would be $1,061: $1,000 FRA increased by 3% for 2023 COLA and 3% more for 2024 COLA ($1000*1.03*1.03).

If you wait beyond FRA, then you’ll start to see the effect of the 8% per year delayed retirement credit, too, Principe said.
At 67, your benefit is $1,103 per month, he said. Delayed retirement bumps it up 4% above FRA and then you add 3% COLA for 2023 and 2024 ($1,000*1.04*1.03*1.03).

At 68, 18 months after FRA, it’s $1,224 — now 12% higher for delayed retirement plus 3% COLA for three years ($1,000*1.12*1.03*1.03*1.03), he said.
And at 70, 42 months after FRA, it’s now $1,484 — a 28% increase for delayed retirement plus 3% COLA for five years from 2023-2027 ($1,000*1.28*1.03*1.03*1.03*1.03*1.03).

The result in this scenario is a benefit nearly 50% higher than if you were to start now, and the “break even” point at which you’d have received more from Social Security by having waited would be around age 81.

“Going back to the idea of `what’s best,’ break-even at 81 sounds pretty good — only 16 years from now — and a higher benefit for life beyond that — think inflation — also sounds desirable, but the question is whether there are other things before age 70 that you would otherwise be delaying?” he said. “A body ages between 62 and 70, as do children and grandchildren. Would starting Social Security early permit any life experiences that would have to be delayed or might be missed entirely?”

Principe said he has at least one client who made the “very pragmatic decision” to start taking benefits before FRA and she doesn’t regret it. Starting early helped her and her husband live better lives over the past few years before he died this past summer, he said.

So, is now the right time?

“Ultimately, you’ll be the judge – check in with your inner voice, assess what you might miss out on, consider consulting with a qualified fiduciary financial advisor familiar with your particulars, and you’re bound to make the right decision,” he said.

As a side note, before you turn 65, you should probably review your company-sponsored medical benefit to make sure you’re clear about your next steps with respect to Medicare, he said.

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This story was originally published on Nov. 4, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.