The Benefits of Delaying Social Security

I occasionally plow through dreary assessments of how little we boomers are inclined to save and the risks that creates with our retirement prospects…. I do this reading for you, so you won’t have to :-)

Occasionally a gem of wisdom will pop out, making it all worthwhile. And those, of course I will pass along. So from an Economic and Budget Issue Brief from the Congressional Budget Office, dated March 14, 2004, entitled “The Retirement Prospects of the Baby Boomers,” comes an excellent and concise summary from a section entitled “The Effects of Delaying Retirement”:

"For households facing shortfalls in their retirement savings, relatively small changes in behavior can have surprisingly large effects. Because people who retire at 62 can expect to live another 20 years, each year they postpone retirement reduces their need for retirement savings by about 5 percent. An extra year of work also increases their Social Security benefits by several percent. Taken together, those effects lessen the total amount that people need to save, and the additional year gives them time to save more and earn returns on the assets they have already accumulated. As a result, households can make up for earlier shortfalls in retirement savings with surprisingly modest changes in behavior."

When I wrote “Don’t Do It,” dated November 20th, 2007 on this blog, I felt like a killjoy. You know, like the kid who reminds teachers that they forgot to give homework. Saying no to people is not exactly the way to build up a readership, but this is such an important principle, and with apparently so many of you (70+% !!!) planning to begin taking your benefits “early,” I just had to do it.

So let me take a positive approach. Here are the BENEFITS of waiting. For every year you wait:

+ Your total retirement needs drop by around 5%, as it says in the CBO article (because you're funding one less "idle" year)

+ Your benefits when you take them will be 7-8% higher FOR LIFE

+ You have one more year of earnings on your savings and investments

+ … Or one more year to pay down on debts

+ If you keep your career job, you will also probably raise the base against which your benefits are calculated.

(Added this inadvertantly omitted item on January 15th:
+ Between the ages of 62 and 65, continuing to work will keep your existing health insurance in place - It is often misunderstood that even if you collect social security early, the normal eligibility date for Medicare is still age 65, leaving you to fend for yourself for those three years.)

Now there’s a financial analysis involved in all of the above, and if you have a financial person “run the numbers,” you can actually project a breakeven point beyond which you have a net benefit. You might determine, for example, that you’ll be better off if you live longer than 77-78… that would be a typical number.

But there’s a bigger factor in this decision. It’s a huge factor, in my opinion… FLEXIBILITY.

Given two decisions of roughly equal value, you should always take the one that offers you the greater flexibility. If Decision A precludes EVER being able to pick Decision B, and Decision B does not preclude you from ever picking Decision A, you should go with Decision B every time.

The above decision rule has proven itself time and time again in my life because, as has been said, “Prediction is very difficult. Especially when it is about the future.”

The truth is, we don’t know which decision will be better for us. But for every year I hang in there, all of the above listed benefits apply. And if I change my mind or truly NEED to start collecting, I can always reverse the decision to wait, and start collecting at age 63, 64, etc.

(Tomorrow I will discuss the three main exceptions to this rule. When any of these apply, EVEN I I will give you my blessing to “take the money and run.” :-) Bob

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