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3 Temptations to Take Social Security Early, and Why Patience Pays Off

Last updated 01/26/2024 • By Jason Siperstein, CFA, CFP®, RMA®

Social Security

There are a lot of reasons why people choose to claim Social Security early. From the media to friends, people are bombarded with lots of concerns.

In this post, we outline 3 of the most popular reasons why people take Social Security early…AND attempt to explain why they shouldn’t!

1. “It’s not going to be around for much longer.”

We hear this reason often and it comes as no surprise. In 2022, Social Security estimated that its trust fund will be depleted by 2035. That is only 13 years away and seems to be moving closer every year. Though, this does not mean that Social Security will vanish.

From 1935 until 2010, Social Security collected more in taxes than it paid out to beneficiaries. Social Security put these surplus dollars in a trust fund, and it grew each year.

When Social Security was first established in 1935, conditions were ripe for the trust fund to grow:

In 2010, Social Security started running at a consistent deficit because conditions changed:

And the trend keeps getting worse, but this does not mean that Social Security will go away!

And the trend keeps getting worse, but this does not mean that Social Security will go away!

It will still collect taxes from the workers paying into the system. And if nothing is changed, Social Security should still be able to fund 78% of benefits from taxes alone.

And the math to bridge the coverage gap from 78% to 100% is not complicated and changes will be made. But like anything else in Washington, my guess is that it will come down to the wire (around 2034 when the trust fund is almost depleted). CNBC put out a good article showing potential solutions and their popularity.

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OUR TAKE: If you are in your early to mid-60s, we don’t think you need to worry about how Washington fixes Social Security. We think you will be grandfathered into current rules. It will be the younger and/or high-income (not retired) folks that will be most impacted.

2. “I want the income now.”

We hear you loud and clear! You worked your whole life for those benefits and deserve to enjoy them. However, I would recommend taking that income from your investment portfolio instead of claiming early (assuming this is sustainable).

Deciding when to take benefits will have a permanent impact on the benefit you receive. Claiming before Full Retirement Age (FRA) can significantly reduce that benefit (up to 30% decrease) whereas claiming after, significantly increases it (up to 32% increase). FRA refers to the age when you are entitled to 100% of your benefit.

Occasionally, we hear someone say, “but taking income (early) from Social Security will let my portfolio grow, which would offset the reduction in Social Security benefits.”

However, for it to offset the permanent reduction in Social Security, you would need to earn a consistent annual return of 7% to 8% from your portfolio (assuming you live until 90). Earning a 7% to 8% return is difficult – especially because you should not have an aggressive portfolio in your later years.

To provide some context, a portfolio of moderate risk (60% stocks and 40% bonds) produced a 6.4% annualized return from 2001-2020 according to J.P. Morgan. This is lower than the 7-8% needed to compensate from taking Social Security early. Also, keep in mind that most economists are predicting lower returns in the future.

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OUR TAKE: This just requires a mindset shift. Take the “income” from your investment portfolio to let Social Security benefits increase to their maximum amount. This way you can enjoy the extra spending while giving yourself the best shot of maximizing lifetime Social Security income.

3. “I don’t know how long I am going to live.”

This is the third most common reason people claim early. The thinking goes like this, “If I die early, at least I would have gotten something instead of waiting.”

However, unless you have a medical condition, there is a 50% chance that at least one person in a couple lives until 90 years old! And you don’t even need to make it to 90 for claiming later to be worth it:

Of course, these percentage are of the general population for married people. You can adjust these percentages based on your own health status, family history of longevity, and marital status.

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OUR TAKE: Since you don’t know how long you have, you need to make the best decision without all information. We believe the best way to do this is by looking at the average longevity statistics and tweaking those percentages according to your unique profile.

By Jason Siperstein, CFA, CFP®, RMA®

Jason Siperstein is a fee-only financial planner that specializes in retirement planning. He is based in Rhode Island and serves clients locally and across the country. Jason is called on by local and national news to share his insights.

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Social Security” is the term used for the Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States. It’s run by the Social Security Administration (SSA), a federal agency. It’s best known for retirement benefits, but it also provides survivor benefits and income for workers who become disabled. Read more…

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