Social Security: Distribution Strategy.

November 25, 2023

Social Security is an extremely important part of any potential retiree’s financial plan. It’s complicated and there are thousands of different experts with opinions on how you should use it.

Questions you may be asking include:

  • When am I eligible?
  • Should I take my benefits early or should I wait?
  • If I wait, how long should I wait?
  • What’s the benefit or drawback of waiting?
  • Let’s describe the basics and let you go from there.

Almost everyone reading this will be eligible to begin taking social security benefits at age 62. You have to qualify for benefits by paying into the system for a required amount of time, and there are some careers that do not participate in the social security system. However, most jobs do participate and take social security contributions from your paycheck. Those that pay quarterly taxes are also required to pay into the system. So for the most part, eligibility begins at age 62.

Once you achieve the age and participation requirements, you will have a series of decisions to make. If you’ve retired, then you can take social security benefits immediately after turning 62. The social security administration can tell you how much that amount will be. You will also have the option to delay receiving those benefits as long as you’d like until you’re 70, at which point you will be required to take the payment.

Why wait past age 62? Because your benefits go up. Every year you delay past age 62, your payment goes up roughly 7.9% over the year before. Let’s consider a person that would get $1000 per month at age 62. If elected to wait and start taking those payments at age 63, they would receive about $1080 per month. Every year you delay, your payment would continue to increase until you reach age 70, when you’re forced to take the benefits.

So delaying seems like a no-brainer, right? Not so fast. Yes your payments go up if you wait to start taking it, but you also forfeit a period of time where you’re not getting paid at all. At age 77, both payment stream will have paid about the same amount of money overall. Delaying your benefits really isn’t a lucrative strategy unless you expect to live a relatively long life.

Assume Jerry and Brad are the same age. Both retire at age 60 from the same job. Their Social Security statement looks identical. Brad elects to take benefits at age 62. Jerry decides to delay to 67. By age 77, they will have received almost the same amount of money. Yes Jerry got more per month but by the time he turned 67, Brad will have been receiving benefits for 5 years.

OK, so how do we play that particular game to your advantage? At best it’s an educated guess. If you’re very healthy and in your early 60’s then your odds of living past age 78 are relatively high. The longer you live past your breakeven age, the more it makes sense to delay benefits.

Questions such as: “are you a healthy person?” and “How old were/are your parents?” are important in this situation. If you are healthy and carry longevity in your family then you should consider delaying the benefits if possible.

Ok, so if you’re healthy and don’t absolutely need the income, it can make sense to wait. If you need the income to supplement your retirement or have some health issues then you should most certainly elect benefits at the earliest opportunity.

There’s one major qualifier here. You must be at least mostly retired for this decision to really matter. If you’re still working full-time at age 62 and attempt to get benefits, then your payment will be cut in half. There is an allowance made for some employment income but it’s a relatively low bar that is adjusted annually.

There are many factors that play into social security and your decisions to begin benefits. You should be keenly aware of some of the bigger issues before that day comes.

  1. Do you need the monthly income in order to retire?
  2. Are you still working full-time at age 62 and beyond?
  3. Is your family relatively long-lived?

As a CFP®, I recommend that you begin your retirement preparation 7-10 years before you anticipate to actually retire. Social security planning is an integral part of that plan. Get your statements and have a good idea of how you want to make the system work best for you. What serves you best may be very different decision than what serves your peers.