If you want to maximize your monthly Social Security benefit, it may make sense to wait to collect your benefits until you are 70 years old. At 70 years of age, your Social Security benefit maxes out. This means that there is no point in waiting any longer to collect. Your benefit is not going to get any larger.
For some retirees, waiting until 70 years old to collect is the goal. It is an intentional decision in an effort to maximize monthly retirement income.
By waiting until age 70 to collect, a retiree is effectively creating the highest possible, inflation-adjusted, guaranteed income that is provided by the US government. In one sense, waiting as long as possible to collect could provide a hedge against longevity risk (the risk that you live too long).
This doesn’t mean that a retiree may never run out of money (other investments), but it does mean that if they do, the income from Social Security is higher than if they had collected at some age before 70.
However, maximizing social security income at age 70 in order to hedge longevity shouldn’t be the only consideration. For example, if a retiree needs income prior to age 70, they likely have a choice between personal investments (savings) and/or Social Security. By waiting to collect Social Security, it may force a retiree to spend their own money while they wait to collect Social Security.
However, spending your own money first is one of several topics that should be considered before collecting Social Security. Let’s take a deeper look into this issue, among others.
You Spend Your Own Money First
Many retirees don’t wait until age 70 to retire.
Typically, as retirement begins, an established income ends. When an earned income ends (w2 wages), it needs to be replaced by income (or assets) from another source. Otherwise, a retiree runs the risk of not having enough money to cover their living expenses.
This retirement income is often derived via a combination of the following 3 sources: pension, social security, and other savings/investment accounts.
If we are to assume that a retiree delays the initiation of Social Security until age 70, we should assume that they plan to withdraw more from their savings and investment in order to meet their expense needs (in this sense, more from their investments, as compared to if they had started Social Security).
While withdrawing from investments isn’t a bad thing, it is important to consider the following: You are spending your money first.
So why does this matter?
If you die prematurely and have been withdrawing from your personal assets, your beneficiaries will likely receive less than if you had chosen to collect Social Security early.
A simple hypothetical example to illustrate (assuming no growth on the investments):
If we compare the same retiree withdrawing from investments vs. collecting Social Security, we notice that the client spending their own money actually has less after Year 1. If the retiree is to die after 1 year, then it would have made sense to collect Social Security instead.
|Scenario 1||Scenario 2|
|Total Personal Assets||$1,000,000||$1,000,000|
|Total Income Need||$30,000||$30,000|
|Received from Social Security||$30,000||0|
|W/D from investments||$0.00||$30,000|
|Investment Assets year end||$1,000,000||$970,000|
Unfortunately, we don’t know when we are going to die. For that reason, it often makes sense to plan and prepare as though we will live a long life. While it’s beyond the scope of this article, there is a break-even point, at which the investment bucket in Scenario 2 catches up and exceeds the investment bucket in Scenario 1.
(For what it’s worth, the consideration of “winning” by dying early holds very little water for me. If you happen to intentionally delay collecting Social Security for a few years and die, you were a bit unlucky. Being unlucky, your family did inherit a little less than had you started Social Security early. However, in my opinion, it is often the right decision. No one knows when they are going to die. As a responsible retiree, it makes sense to prepare as though you are going to live for a long time).
Provides Protection Against Longevity
Social Security, by guaranteeing monthly payments (often payments that are adjusted for inflation), delivers one of the best protections against longevity risk – the risk of living too long.
As a retiree, one of the biggest concerns is running out of money.
The question is when is the risk highest that you would run out of money?
Many times, the risk of running out of money in your 60’s, 70’s, and early 80’s is low (if it is, then you probably retired too early!). If running out of money becomes a concern, it’s more likely to happen as a retiree spends more and more time in retirement.
If you run out of money (investments), then wouldn’t it be prudent to create the highest amount of Social Security income possible?
The highest income from Social Security is saved for those who wait to collect social security until they are 70 years old.
For example, a retiree who had had the option to collect at 62 or 70 may have Social Security income that looks something like this hypothetical example.
- If they started at 62 – $2,000 per month
- If they started at 70 – $3,520 per month
This is a 76% difference in the value of the benefits (although you did miss out on 8 years of collecting).
Social security is projected to pay this benefit for as long as you live. Therefore, if all else fails, the amount you receive at 62 or age 70 will pay you for a lifetime.
While running out of money is never a good thing, it’s nice to know that the income you created from the system is 76% if you wait until 70, rather than had you started at 62.
It May Impact Your Taxes
The taxation of Social Security deserves its own blog post (fortunately for you, here it is).
The amount of Social Security that will be taxed is based on your earned income, your pension distributions, and other income that has been reported on your tax return.
What is important for this discussion is to recognize that collecting Social Security early may or may not be a good idea based on these other income sources.
Delaying or collecting Social Security may lead to anywhere from 0% of this income being taxed up to 85% of this income being taxed.
Other reasons to delay could include opportunities to take advantage of low tax rates on distributions from IRAs.
Taxes, as usual, need to be a part of the conversation.
The Best Social Security Decision
The best Social Security decision may not be the most obvious, it may not be the one that says “collect as early as possible”, and it may not be the one that says “wait until age 70.”
In fact, the best option for Social Security is one that considers the multi-faceted impact of longevity, tax, family, other assets and income needs.
Only then will you be able to make the best decision regarding Social Security for you and your family.
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. Tax services are not offered through, or supervised by Lincoln Investment, or Capital Analysts.