The average age of a client at our firm is 59, so it stands to reason that a frequent topic of discussion is when to take Social Security. As defined benefit pension plans become less prevalent, this election becomes increasingly important as part of retirement income planning. After all, you work for 40 years with this taken out of your paycheck, so choosing your benefit properly for you and your family is critical.
I had a recent Zoom meeting and the topic of the right time to elect Social Security came up. Inevitably, we always get to the “if I wait longer, I get more” part, but it is helpful to put some numbers to that statement. If your full retirement age is 67 and you elect to take Social Security when you are first eligible, at 62, the breakeven age is 78 years and 8 months. While you took a lower monthly amount because each year you wait is an 8% increase in your benefit, you do have the advantage of taking 60 monthly payments before the full retirement amount kicks in. The breakeven between taking your benefit at 62 and 70, where you receive a 30% increase in your full retirement age amount, is just over age 80. At this point in the discussion, we realize that this election is unique to everyone, and there is no right answer.
If you knew your exact longevity and elected to receive your benefit at the optimal time, it’s not like you would host a Social Security breakeven party. We were both a little cavalier in this meeting about the breakeven party. Still, it made me think about the amount of emphasis placed on the “right” time to elect while understanding that there are financial and non-financial components that should have weight as well. I have textbook after textbook that encourages deferring your Social Security election to 70. After all, an 8% increase annually is an attractive component. But the textbook guidance uses assumptions and not your unique circumstances. The assumptions are based on historical cost of living adjustments (COLA) and increasing longevity. In the last ten years, the COLA on Social Security has averaged 1.65%, strengthening the case for deferral of your benefit. Per the CDC, 2021 was the second year in a row where life expectancy in the US has declined. This was largely pandemic driven, but many health-related conditions factored into this drop, bringing us back to 1996 levels. If that were to persist, that would tilt the decision toward electing your benefit earlier. While everyone clearly understands inflation at this point, it has already impacted the COLA figures. For 2022, almost 70 million Americans received a 5.9% increase in their benefit.
For 2023, it has been released that the cost of living adjustment is 8.7%. For some historical perspective, the average COLA in our most recent inflationary period, 1979-1981, was 11.8! In these periods you have a more significant increase in your benefits, had you elected, than you would have received had you deferred another year.
After 2015 the ability for a married couple to file and suspend and restricted applications (a small minority, but you know who you are) was eliminated by Congress, so there is a lot less flexibility for Social Security planning. Just because there is less flexibility does not minimize the importance. Let’s look at the changing landscape of Social Security and focus less on being “right” on your election versus what works best for you and your family. After all, if I do get invited to a Social Security breakeven party, I’m going to be thinking that the party would likely be more fun at 62 rather than 78 years and eight months. Just a hunch…
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