Why Social Security Means More To Your Retirement Than You Think

There are many people who feel that Social Security will not factor much in their retirement plans. They feel the benefit is too low to impact the quality of their retirement and that it may not be around much longer. In 2019, the average monthly benefit for Social Security was $1,427 for a single person and a married couple together collected an average of $2,340 per month. Alone, that figure is not very much to live off of. At first glance, you may come to the conclusion that your benefit will also be very low. That would be a mistake.

Those stats skew the value of Social Security in a variety of ways. First, many people make the mistake of collecting Social Security too early. A full 57% percent of Social Security recipients take their benefits before their full retirement age and 34.3% collect as soon as they are able at age 62. Collecting early reduces your benefit permanently. For some people, taking it early may make sense, but those are typically cases with special circumstances. If you have no other way to receive or earn income and you need those funds to pay bills, then you have little choice but to collect early. Others may have health issues that lead to a shortened life expectancy or you may have pensions and a large amount of savings that may affect your decision to draw early.  For many people, when you decide to collect will have a material impact on your retirement and collecting early can mean the loss of large sums of money over the course of your life.

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Depending on what year you were born, waiting to take Social Security will increase your benefit between 7% and 8% per year until Full Retirement Age (FRA) and from FRA until age 70 it will increase about 8% per year. Waiting eight years to claim Social Security at age 70 can increase your monthly payments by more than 75%. The downside is missing 8 years’ worth of payments waiting to collect. There is a breakeven point and the longer you live; the greater benefit it is to wait. The breakeven point for ages 62-66 is between 77 and 78 years old, ages 62-70 it is between 80 and 81, and ages 66-70 it is between 82 and 83.

To illustrate, I will use the real life example of a married person with a projected Full Retirement Age benefit of $3,112 per month at age 67. Their age 62 benefit is $2,089 month and their maximum benefit at age 70 is $3,923. His spouse stayed at home to raise the kids and does not qualify on their own for a Social Security benefit but will qualify for up to ½ of the working spouse’s benefit at FRA or a reduce amount for taking it earlier than FRA. If taken at age 62 she would qualify for 32.5% of his benefit. She will not get any additional benefit for waiting beyond FRA.

If they both take their benefits at age 62 then their total Social Security benefit will be $2,089 (primary filer) plus $1,089 for her benefit for a total of $3,178 per month. That comes out to $38,136 per year. If they both wait until they get the maximum benefit the primary filer would get $3,923 per month at age 70 and at FRA of 67, she would receive 50% of $3,112 (his FRA benefit amount), or $1,556 per month for a total monthly benefit for the couple of $5,479 per month. That is a total yearly benefit of $65,748 per year. That is a $27,612 difference in income per year! To put that into perspective, the median household income in the US in 2019 was $68,703.

For people with no guaranteed income (pensions or annuities), you would either have to work until you collect Social Security or rely on savings until you file for benefits. The downside of using savings is missing out on investment earnings while waiting to file, but the benefit of higher guaranteed earnings may outweigh the potential of additional earnings. In addition, if one of the spouses were to die, the surviving spouse would receive the greater of the two benefits. That means the surviving spouse will get a benefit of $3,923 per month, or $47,076 per year as opposed to $2,089 per month, or $25,068 per year had he chosen to take his benefit at age 62. Big difference.

An additional consideration is the yearly cost of living adjustment. Waiting to take a benefit also increases your cost of living adjustments for the rest of your lives. Taking the benefit at age 62 with a cost of living adjustment of 2.5% results in an increased benefit of $953.40 per year for both ($38,136 X .025). If the benefit were taken at age 70 the same cost of living adjustment would be $1,643.70 per year (65,748 X .025). These rate increases compound year after year increasing the benefit of taking your benefit later.

This is just one example of how taking a benefit later can increase your lifetime benefits from Social Security. There are many different factors and the decision of when to take your benefits should be made with the help of a qualified financial advisor.

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