Q & A
Ask Rusty – “Rat Holes” in the Social Security System
Dear Rusty: I am single and will be 63 on July 1 this year. I was born in 1955. I have been considering retiring sooner rather than later. (In other words, before FRA, which for me is 66 and 2 months). I have been reading about the “rat holes” in the Social Security system that may affect my timing for when I choose to begin my SS – I can’t quite figure out a strategy as to when to begin my SS so as not to fall into that rat hole. Can you possibly advise me as to when would be the soonest that I should choose and not “take a hit”, so to speak? Or does it not really matter that much? Signed: Trying to Decide
Dear Trying: I’m not sure what you’ve been reading which describes Social Security’s “rat holes”, but it sounds to me like hyperbole designed to get you to buy something. Social Security really doesn’t have any secrets or nefarious traps designed to cheat you out of the money you’ve earned from a lifetime of working, although it is a necessarily complex topic which governs a myriad of possible claiming choices by millions of different people. But at a basic level the rules are pretty simple: if you claim benefits at your full retirement age you’ll get 100% of the benefit you are entitled to from your lifetime of working; if you apply sooner you’ll get less and if you claim later you’ll get more. Age 62 is the earliest you can collect and age 70 is the latest you should apply.
Deciding when to claim your Social Security is never really a simple matter, but rather one that should take into account your health, your family history of longevity, and your current and future financial needs. If you’re in good health, come from a family which typically lives to a ripe old age and don’t really need the money right now, then waiting until at least your FRA and possibly longer will get you a bigger benefit check. But if you’re sickly and/or need the extra money now to pay your basic living expenses, then collecting earlier makes a lot of sense. The fact is that Social Security was designed to pay out about the same amount of money regardless of what age you apply – if you claim early your checks are smaller but you get more of them; if you wait until later your checks are bigger but you don’t get as many. But that logic depends almost entirely on how long you live. You may want to do a “break even analysis” which will show how long you would need to live to break even if you collected at age 66 versus collecting at age 63, or when you would break even if you waited until you are 70 to apply versus claiming at your FRA. Here’s a link to an article on how to do a break-even analysis: https://socialsecurityreport.org/ask-rusty-doing-a-breakeven-analysis/. Of course, if you live beyond the break-even age you’re ahead money, and the average life expectancy today is in the mid-80’s (slightly more for women).
So as to your specific question of when is the soonest you can collect without “taking a hit”, that would be at your full retirement age when you’ll get 100% of the benefit you’ve earned from working your entire life. If you claim earlier than that your benefit amount will be reduced by about 6.7% for each year early, and if you apply later than your FRA
your benefit amount will grow by 8% for each year you delay up to age 70 when it reaches maximum. Does it really matter that much? Well that depends on how healthy you are, how long you think you will live and how badly you need the money. But it’s a choice only you can make.