Should You Take Social Security at 62, 67, or 70? The Hidden Costs of Delaying Benefits

Should You Take Social Security at 62, 67, or Wait Until 70? The Surprising Truth Revealed

Introduction: The Popular Retirement Advice That Might Be Wrong

You've likely heard the mantra: "Delay Social Security to get an 8% return." It sounds smart and financially sound. But is it really? Many retirees might be losing more than they gain by delaying benefits. In this post, we'll explore the real math, opportunity costs, and hidden variables behind this crucial decision.

The 8% Return Myth: Misunderstanding Social Security Credits

While it's true that delaying Social Security past full retirement age (FRA) can increase your benefit by 8% per year, this only applies between ages 67 and 70. It’s not a true "return" like an investment. Instead, it's a larger check in exchange for fewer years of receiving benefits.

Full Retirement Age Explained

Your FRA is 67 if you were born in 1960 or later. Claiming at 62 means a 30% reduction in benefits, while waiting until 70 means up to a 24% increase over the FRA benefit.

The Hidden Opportunity Cost: Drawing From Your Portfolio

The Cost of Withdrawing Investments Early

If you delay claiming Social Security, how do you fund your retirement? For most, it means pulling from investment accounts like IRAs or 401(k)s. Every dollar withdrawn early is a dollar that stops compounding.

A Dollar Lost Is Growth Lost

Taking Social Security early can reduce how much you need to withdraw from your investments, preserving capital and allowing for more long-term growth. That opportunity cost could outweigh the benefit of delaying.

A Real-Life Case Study: Meet Joel

Joel, 64, just retired with $850,000 in retirement savings. He needs $5,200/month to cover expenses. His options:

• Claim now at 64: $2,000/month

• Wait until 67: $2,700/month

• Delay until 70: $3,400/month
  

Comparing Outcomes

If Joel claims now, he pulls $3,200/month from his portfolio. If he waits until 70, he needs to pull the full $5,200/month until then. With a 7% portfolio return, taking Social Security early may preserve more of his investments long-term.

Investment Returns Change Everything

What Happens at Different Return Rates:

• 9% Return: Early claiming is the clear winner.

• 7% Return: Still slightly favors early claiming.

• 5% Return: Delaying begins to look more attractive.

Why It Matters

The higher your portfolio’s return, the more beneficial it is to leave your assets untouched. Claiming earlier lets your investments grow untouched longer, potentially outperforming the increased benefit.

Beyond the Numbers: Other Critical Considerations:

Taxes and Provisional Income

Withdrawals from tax-deferred accounts are fully taxable. Social Security is only partially taxed based on your provisional income. Taking Social Security earlier could lower your tax liability by reducing taxable withdrawals.

What Is Provisional Income?

Provisional income is used by the IRS to determine how much of your Social Security benefit is taxable. It includes three components:

• Your Adjusted Gross Income (AGI)

• 50% of your annual Social Security benefits

• Tax-exempt interest income (typically from municipal bonds or bond funds)
  

Based on your provisional income and filing status, up to 85% of your Social Security benefits may be taxable. Understanding this formula is key to planning tax-efficient withdrawals in retirement.

ACA Premiums for Early Retirees

For those under 65, higher income can reduce subsidies for ACA health insurance. Drawing heavily from pre-tax accounts to delay Social Security might increase your income and raise premiums.

Spousal and Survivor Benefits

Delaying your benefit could mean a higher survivor benefit for your spouse. Or if your spouse qualifies for a spousal benefit, the timing of your claim may affect what they receive.

Longevity and Health Outlook

If you're in good health and expect a long life, delaying might pay off. If health is a concern or you want guaranteed income sooner, claiming early might be the better route.

The Fiduciary Advantage: Get Personalized Advice

A fiduciary financial advisor can help you analyze this complex decision, considering taxes, investments, health care, and spousal needs. Fiduciaries are legally required to act in your best interest and typically work on a fee-only basis.

Conclusion: There Is No One-Size-Fits-All Answer

Deciding when to claim Social Security is about more than just math. It's about opportunity cost, tax strategy, market returns, and your personal situation. Use this framework to make an informed decision, and consult a fiduciary financial advisor to ensure your strategy fits your unique needs.

FAQs

1. Is it always better to delay Social Security until 70? No. While the monthly check is larger, opportunity costs and portfolio withdrawals may leave you worse off.

2. How does claiming early affect my taxes? It can reduce taxable withdrawals from your portfolio, potentially lowering your overall tax burden.

3. What is provisional income and why does it matter? Provisional income determines how much of your Social Security is taxed. It includes AGI, 50% of benefits, and tax-exempt interest.

4. Should I factor ACA premiums into my decision? Absolutely. Drawing heavily from pre-tax accounts can raise your MAGI, increasing premiums.

5. Who should I talk to before making this decision? A certified fiduciary financial advisor who understands the tax, investment, and healthcare interplay in retirement planning.

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