Consider these twin concepts—opportunity cost and delayed retirement credits—before you decide when to start taking Social Security.
By waiting until age 70, you’ll increase your monthly benefit, but at what cost? A recent article in Forbes, “Social Security Benefits: Getting Paid To Wait,” examines the dilemma. Money managers call it “opportunity risk:” if you take money from retirement accounts that would otherwise be invested and grow, in order to delay taking Social Security, you are risking the potential for that money to grow.
Can you plan for opportunity cost? Start by looking at whether to wait to take Social Security after your “normal” retirement age, which is 66 for most people. If you wait to claim at age 70, you’ll see the largest-possible Social Security benefit. If you’re not working, you’ll probably be withdrawing money from your retirement funds, which means that those funds won’t be able to grow for a period of several years. As a result, you’ll need to weigh the opportunity cost of not having funds growing tax-deferred in your retirement accounts, against the larger Social Security benefit you will eventually get.
The math isn’t always easy to calculate, but there’s a simple, indirect rule of thumb that Social Security provides. It is known as “delayed retirement credits.” Based on your birth year, Social Security will give you a bonus for waiting to claim benefits. Take a look at how that works:
Delayed Retirement Credits
Year of birth Credit per year
1917-24 3.0%
1925-26 3.5%
1927-28 4.0%
1929-30 4.5%
1931-32 5.0%
1933-34 5.5%
1935-36 6.0%
1937-38 6.5%
1939-40 7.0%
1941-42 7.5%
1943 and later 8.0%
Therefore, if you were born after 1943, for every year you wait to claim benefits after age 66 or so, you get an 8% bump in potential benefits up until age 70. That can be a sweet deal, especially if your portfolio isn’t giving you that kind of return. If it’s doing better than that (after taxes), then you might want to leave as much money as you can in your own savings.
If you elect to work, you can build up a larger nest egg, avoid withdrawals and take Social Security later for the maximum benefit. However, not everybody can work later, nor will they be able to plan to delay retirement withdrawals or Social Security. However, if you see that your work/lifestyle situation is flexible, you should run several scenarios.
Your decision needs to be made after reviewing every source of income, considering your tax and estate plan. Of course, the more assets you own, the more complex the analysis will become. Taxes are a considerable concern, since most of your retirement fund withdrawals (except for Roth IRAs) will be taxable. Another factor to consider: your expected life span. If you come from a family with long life spans, your planning may be different than if you have a chronic condition, like diabetes or heart disease.
Reference: Forbes (June 1, 2018) “Social Security Benefits: Getting Paid To Wait”