What are the benefits of waiting until full retirement age if I can comfortably live off of Social Security benefits now?
My wife has been retired from the workforce for eight years and the two of us have approximately $750,000 in assets and no debt. Our combined Social Security benefits today would be more than adequate to sustain our current lifestyle. Is there any point in waiting an additional three years to retire at full retirement age if I can comfortably live off of Social Security benefits now?
Congratulations to you! You and your wife have done a fantastic job building wealth for your retirement. As you mentioned, you do not have any debt either, which means you can sustain your certain lifestyle. You can certain retire now and start receiving Social Security now or even later. I always remind clients that these are two decisions. First, when do I want to retire and second when do I want to start receiving Social Security. I don't know the exacts details of your situation: age, investment allocation, the breakdown of qualified assets vs non-qualified assets, access to healthcare, etc.
Claiming before Full Retirement Age (FRA), a benefit is reduced 5/9 of 1% of the Primary Insurance Amount (PIA) for each month before Full Retirement Age (FRA) age up to 36 months.
If the number exceeds 36 months, then the benefit is further reduced 5/12 of 1% of the Primary Insurance Amount (PIA) per month.
Please note that Primary Insurance Amount (PIA) refers to the unreduced benefit that you are eligible to receive at Full Retirement Age (FRA).
There is an actuarial reduction for claiming Social Security benefits early.
Here are two examples
Donald retires and claims benefits 3 years early, so his monthly benefit would be reduced by 20%: 5/9 x 36 = 20%
By claiming benefits 3 years early, Donald permanently reduced his $1,200 Full Retirement Age (FRA) benefit to $960 at 63.
Daisy retires and claims benefits 4 years early, so her benefit would be reduced by 25%: [5/9 x 36 = 20] + [5/12 x 12 = 5] = 25%
By claiming benefits 4 years early, Daisy permanently reduced her $1,500 Full Retirement (FRA) benefit to $1,125 at 62.
Social Security is more than simply a monthly check, it's a valuable source of sustainable retirement income. It offers the following benefits:
- Guaranteed lifetime income
- Inflation-adjusted income
- Survivor and spousal benefits
- Preferential tax treatment
Every situation is unique. I encourage you to work with a professional who is well-versed in retirement income strategies. Good luck to you and your wife.
Well, you get a nice increase every year. So if you dipped into your savings to subsidized your living you would have more monthly income each month after the 3 years. The calcuation is how much annual is the difference once you begin taking social security in 3 years and then will see where the crossover point is from the money you used to subsidized your lifestyle. Is it 10 years, 12 years, etc.. and what is your life expectancy? At the end of the day, you will probably fine either way, but as a rule of thumb, the longer your life expectancy & the better it is to put off social security if possible. It is a mathematical question with a few assumptions made, namely longevity & rate of return on assets. But some things aren't all about money. If it makes you feel more comfortable to take social security now & not dip into your nest egg at all, that is a lifestyle choice.
Hope this helps and best of luck, Dan Stewart CFA®
One of the biggest risk a retiree will face in retirement is the risk of outliving their savings. This is often referred to as "longevity risk". One way to protect against this risk is to maximize your fixed sources of income, i.e. Social Security. Although you can sustain a standard of living currently on Social Security, this may not always be true. Therefore, consider depending on your portfolio of $750,000 for income and delay taking Social Security for as long as possible. Each year that you delay taking Social Scurity benefits, if will increase the amount you receive annually by approximately 7% to 8%. This can be viewed as a guaranteed rate of return that would be hard to earn elsewhere.
Something to think about is the survivor benefit with Social Security. As you may know, the longer you wait to collect, the higher the benefit. As a matter of fact, for every year beyond your Full Retirement Age (FRA), your benefit increases by 8% a year until you turn on the check. You can wait to age 70 before collecting your benefit if you wish. So if you would wait to age 70, your monthly Social Security check would be 32% (i.e. 8% per year more x 4 years = 32%).
The longer you wait to collect Social Security the higher your benefit will be. At death, your benefit will pass 100% to your wife as a survivor benefit (assuming that your wife's own benefit is lower than the survivor benefit...she will receive the higher benefit at your death). So, by delaying your own Social Security benefit, you may be able to provide more income to your wife when you're no longer there. It's a strategy. However, if you can live comfortably on Social Security now, then you may want to do that.
I congratulate you on accumulating a very nice retirement nest egg of $750,000. A suggestion. Try to keep your money as safe as can be (no market losses) so you never have to worry about losing money and spending years just to catch up. A wonderful product is the fixed index annuity with insurance companies. Your principal is protected, you'll earn a very nice tax-deferred return, and you can pass along a legacy to your beneficiaries probate-free!!
Yes, there is a potential substantial benefit for waiting. The benefit is a guaranteed 7%-8% annual increase in your social security benefits for each year you wait, until age 70. So, unless you have your money invested in something that guarantees you will earn 7%-8% compound each year (which does not exist), or you don’t believe it is likely you will live until your Social Security Administration assumed life expectancy, then you would be better served living off your cash/investments, while waiting for your social security benefits to increase.
However, please note, that depending on how much you and your wife will earn from social security respectively, it might make sense for one of you to claim sooner, have the other spouse receive only a spousal benefit, and then for the spousal benefit individual to switch to his/her own benefits at age 70. There are many factors that go into this type of claiming strategy, and it is something you should discuss/confirm with a qualified tax-advisor and/or financial planner.