Let's start with the basics: Should You Wait to File or Not?
For each year you wait after full retirement age (probably age 67 for most readers), your benefits grow 8%, plus inflation. If the COLA adjustment for inflation is 5%, your benefits would increase 13% for waiting.
This means that, net of inflation, a retiree who waits until age 70 to file for benefits receives 25.97% more each month than they would have at age 67. To put it in dollar terms, if you would have received $2000/month at 67, you’ll instead receive $2,519.40 at 70. That’s an extra $6,232.80 per year. That $6,232.80 can pay for a pretty decent vacation, if you ask me.
Conversely, if you claim benefits at 62, you’d get just 68.5 cents on the dollar vs age 67.
What is worth it?
As far as waiting until full retirement age (67) vs taking it early (62), you’re “in the money” if you live to be 78 years old. That means the combination of larger, but fewer payments add up to more money than the total of payments you would have received by starting at age 62.
If you wait from age 67 until age 70 to get those 8% bumps, you’re in the money if you live to be 82. You’ll notice that those figures are slightly below the average life expectancy for Americans, which means that for most people it makes sense to wait. On average.
But other factors can come into play. If you have poor health or need the money, it may make sense to take benefits a bit earlier. Even without health issues, some people with a streak of “carpe diem” may want to use that money immediately, rather than spread it over the course of their retirement. This may or may not be wise, but if you choose this strategy and then die in a sky-diving accident on your 77th birthday, I have to admit there’s a certain wisdom to your life path.
But for the rest of you, if you are in good health and have a family history of longevity, it usually makes sense to wait. If you have medical complications, it might be best to hedge your existential bets by taking Social Security sooner.
Longevity Insurance:
The biggest benefit of Social Security is the most obvious. It helps protect you from running out of money in old age. If for one reason or another, you find yourself running low on funds in your 80s, it is good to have that source of income to fall back on. It almost certainly won’t fund the same lifestyle you enjoyed previously, but it keeps you from starving by providing income throughout your lifetime.
An Inflation Hedge for your Income Plan:
Better still, this source of income is indexed to inflation, which means that it will grow alongside your grocery bill and other expenses. If inflation (as measured by the Consumer Price Index) is 4%, you can expect your benefits to increase by 4%.
Why this matters: Most investments (stocks, bonds, and real estate) tend to suffer when inflation is higher than expected. It’s usually very hard (or expensive) to effectively hedge the risk of surprise inflation when designing a retirement.
An extreme example of this can be seen in the early 1970s. Between January 1973 and December 1974, inflation rose from 3.4% to 12.3%. Over this period, the Dow lost 45% of its value.
2022 offers a similar, but more moderate example. In response to higher-than-expected inflation, the Federal Reserve raised interest rates from roughly 0% to over 5%. From their peak in November 2021, to their trough in October 2023, long term treasuries lost 44.2% of their value. Similarly, the S&P 500 lost 23.55% peak-to-trough, and the publicly traded REIT index (ie, real estate) fell 33.6%.
That’s right! Even real estate, which many think of as an attractive inflation hedge, fell during that period of rising interest rates. In fact, in private markets today, many investors are beginning to see the pain imposed by higher rates and higher inflation as many projects are no longer cash-flow-positive. It just took longer for the pain to show up due to a lack of liquidity and public market scrutiny.
Meanwhile, Social Security benefits rose 5.9% in 2022, and 8.7% in 2023. So over a period in which most investments were down, this piece of your retirement income plan actually saw an increase. (Important note: even if you haven’t started receiving Social Security benefits, you still get those increases credited to your account).
The most common question I hear about Social Security is this: “The news said Social Security is going bankrupt, should I claim it now to get benefits while I still can?”
These reports are somewhat overblown. It is true that the Social Security reserve fund is expected to run out sometime in 2033. But worst case scenario, there will still be enough getting paid into Social Security to continue paying roughly 75% of current benefits (or a 25% cut). This is if congress does nothing and makes no changes to the Social Security system. In fact, there are a few options that would greatly reduce the problem.
Raising Full Retirement Age to 69 would eliminate 38% of the shortfall.
Reducing the Cost of Living Adjustment by 1% would eliminate 65% of the shortfall. This means if inflation is 5%, your benefits would increase by just 4%.
Eliminating the Social Security wage cap would cover 71% of the shortfall.
If Social Security taxes were increased from 15.3% to 17.97%, that would eliminate the shortfall entirely and require no cuts.
Solutions to this problem exist, it just remains a question of who the burden will fall upon. Really, the people who should be most worried about the state of Social Security are young people, since they will almost certainly have to shoulder much of this burden.
That said, cuts to Social Security would make it less favorable to wait. Suppose you are 62 today, and expect benefits to get cut 25% when you are 71 years old, (in 2033). The “breakeven age” for waiting until age 67 to file for benefits gets pushed from age 78 to age 80.
A cut also means that waiting until 70 to file benefits (vs 67), will see that breakeven age pushed back from 82 to 85.
Of course, you still get the benefits of that inflation hedge and longevity insurance, so all else equal it may still make sense to maximize this part of your income picture, even if Congress does nothing to fix the problem. It just won’t be as beneficial as it was.
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