An Option for Claiming Benefits Early
Many retirees cannot afford to wait to take Social Security benefits and need to start receiving their check at 62, the earliest that they are eligible. Most experts agree that if you can afford to, the best option is to wait as long as you can to let your benefits grow before you start collecting. However, this advice assumes that any money received from Social Security will be immediately spent. While this is true for those that rely on Social Security as a primary source of income, some retirees could see a greater return on Social Security should they choose to collect early and invest their benefits. Investing benefits collected early could yield higher returns than the natural growth gained from waiting to collect benefits until a later age. For more information on this subject, visit this article by Dan Caplinger with The Motley Fool.
When to claim (if you can afford to delay beyond age 62) is indeed a complex question – more complex, in fact, than even this Motley Fool article shows. Given that benefits are indexed to the CPI and are in real dollars, the 2% return illustration in the article is probably the most appropriate unless one is willing to invest hyper-aggressively; even then, an 8% real return is extremely unlikely, and a 5% average real return in the current market environment would require a 100% stock portfolio. So based on a more realistic 2% real return, the breakeven would be age 80-81 for delaying claiming from age 62 to age 66. What this does not consider, however, is that under current law SS can only pay full benefits for another 17 years or so; after that, the trust fund is exhausted and benefits will be cut by over 20%. I have done simulations taking the exhaustion of the trust funds into account, and for someone reaching 62 in the next 5 years this could easily extend the breakeven by 2 or more years – basically because it is better to get more years of benefits in before the trust funds are exhausted, if you can. Until the gridlock in Washington is broken and Social Security’s finances are shored up somehow, it may be better for most people to claim at the earliest age they are able given their individual circumstances (which unfortunately is not always age 62; those who are still working and earning more than a pittance have no choice but to wait until full retirement age, which will also increase beyond 66 for those turning 62 after January 1 of 2017).