A recent working paper from the National Bureau of Economic Research took a close look at when people should start drawing Social Security benefits, as well as whether the decisions people make match up with what theory says they ought to do.
What researchers found was a disconnect: It turns out that while many people should consider waiting to take benefits, few people make their decisions based on the most important factors.
The Take-Wait Trade-Off
Right now, you can start taking Social Security as soon as you turn 62. But there's a catch: If you take benefits at your earliest opportunity, you'll take a haircut on your monthly payment, getting 25% less than you would if you waited until your normal retirement age of 66. Taking benefits early also has an impact on how much your spouse will receive if your spouse gets payments based on your work record.
On the other hand, if you don't even need the money at age 66, you can put off starting to get Social Security until your 70th birthday. For each year beyond age 66 that you wait, your monthly benefits will get an 8% increase.
So there's clearly a trade-off. Wait longer and you'll eventually get bigger monthly payments, but you'll collect fewer months of benefits over the course of your lifetime. Start earlier and you'll get money faster, but in the long run, you could be worse off.
Key Factors to Consider
According to the study, current interest rates are the key to when most people should take Social Security.
When interest rates are low, the reward from getting higher monthly payments later is a lot greater than the value of getting income now, making it pay to wait. When interest rates are high, it makes more sense to get money sooner rather than later, even at the expense of getting smaller monthly payments. Right now, rates are low enough to make waiting the smart choice for most people.
In addition, family considerations -- whether you're married or not -- play a role.
At current rates, unmarried retirees should delay taking Social Security if possible, although the study found that men shouldn't wait until age 70 because of their shorter life expectancies. Married retirees, on the other hand, have a balancing act as one spouse may get payments based on the other spouse's work history. In general, for one-income families, interest rates have to be very high in order for it to make sense to take benefits sooner than later. In two-earner families, the person with the higher income should usually wait, while the lower-income spouse should take spousal benefits at normal retirement age.
This Is Not a Drill
In the real world, though, people can't look at Social Security as a theoretical exercise. The study found that retirees with higher levels of education tended to wait to receive payments, but that was often because they had more savings set aside and thus didn't need benefits as much.
In addition, your work status makes a big difference. More than 75% of early retirees took their benefits right at age 62. On the other hand, it usually doesn't make sense for people who are still working to take benefits before age 66, as your Social Security benefits get reduced by $1 for every $2 you make above $14,640 per year until the year you reach your normal retirement age.
What You Should Do
As with any study, this research gives broad guidelines, rather than specific advice. In particular, with the research based on actuarial statistics, it doesn't take into account any personal health issues you may have. In general, the longer you expect to live, the more it makes sense to wait.
As complicated as this question is, the key takeaway is to remember that taking Social Security isn't something you should decide on a whim. If you consider carefully all the trade-offs involved, you can make a decision that could mean thousands of extra dollars for you and your family.
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