As is always the case, putting some pencil to paper to create a clear comparison is much better than just trusting your gut.
The premise sounds fantastic. Wait until you’re 70 to file for Social Security retirement benefits, and you’ll enjoy payments that are about one-fourth bigger than what you’d be getting by claiming at your so-called full retirement age of between 66 and 67 (depending on when you were born). That’s a nice little bonus for being patient.
It’s not necessarily the right choice for everybody, though. In fact, in some cases, this plan could prove quite problematic.
That’s not simply because you’ll collect benefits for fewer years than you would by filing earlier in your life; on average, your total lifetime benefits are statistically about the same no matter when you claim. No, there are three very specific ways beyond the mere math of the matter that this strategy could end up backfiring.
1. The risk of reduced payouts looms
Perhaps the most obvious risk here is that the Social Security program’s seemingly never-ending solvency challenges could force the program to reduce the size of its payments in the foreseeable future. As of its latest assessment, the program’s board of trustees fears that — without any changes being made in the meantime — in 2033 Social Security benefits will see a legally required 23% across-the-board reduction in every recipient’s payments. These reductions will happen no matter how long you’ve been receiving benefits. To be clear, even if you’ve yet to claim them by then, if you begin receiving these payments before you turn 70, your already-smaller payouts will become even smaller.
If you begin receiving these benefits before this payment reduction is imposed, though, you’ll at least have received 100% of everything you’re due for a while. Mathematically speaking, you’d still be better off by virtue of putting more money in your pocket up front for as long as you can. Just bear in mind you might want to make a point of saving and investing these premature payments for the rainy day you know is coming sooner or later.
2. Your time could be more valuable than squeezing more money from Social Security
Whether or not it makes sense to wait as long as you can to claim benefits largely depends on your health, how you plan to spend your time before and after you initiate your Social Security benefits, and whether or not you intend to work until you turn 70.
Image source: Getty Images.
The ultimate concern here, however, is really just making sure you’re able to enjoy the time and money you’ve worked hard to secure at some point in the future. Your time getting to enjoy what’s left of your life really is more important than money.
3. Your 60s are a critical time for your retirement nest egg’s longevity
Finally, one of the most overlooked risks of postponing the initiation of your Social Security benefits is the possibility of whittling down your retirement savings during the first few years of retirement to levels that prevent them from lasting your whole lifetime.
Obviously, this worry won’t apply if you’re still working and adding money to a retirement account rather than subtracting from it. For anyone planning on retiring before turning 70 and then living on their savings until their Social Security benefits kick in at the age of 70, though, know that you’re (proverbially) playing with fire. There’s little room for error here.
Some number-crunching done by brokerage firm Charles Schwab (SCHW +3.06%) puts things in perspective. It explains that if an average portfolio you’re withdrawing 5% from every year for retirement income suffers a 15% pullback in the first two years of your retirement, it will likely be worth nothing within about 18 years. If that same 15% stumble takes shape after the 10th year the portfolio is being used to supply retirement income, however, these savings are apt to outlast their owner.
The kicker: It’s not always clear until years later that your retirement portfolio has suffered a fatal blow.
The point is, even if it’s only going to be for a short while, any period between your retirement and the beginning of your Social Security payments is already risky enough. Putting even more performance pressure on your portfolio because you’re taking money out of it this soon only adds to the risk. Indeed, you may be better served in the long run by accepting small Social Security payments well before you turn 70, just so you can leave your retirement nest egg at least mostly untouched for a few more years.
Address the most likely problems first
These aren’t the only ways delaying your Social Security benefits could do you more harm than good. There’s also the possibility that you could achieve a better rate of return on this money than you’d effectively get by letting the program continue sitting on your potential payout payments. And, for a small handful of higher-income retirees, a bigger Social Security payment just might nudge them into a higher tax bracket even if most of their Social Security income itself isn’t directly subject to taxation. Never say never.
By and large, though, the three considerations highlighted above are the ones worth considering before you make such a big decision. They seem to be the ones that end up causing the most headaches and heartaches.
