Nobody knows exactly how long Social Security will last, but for the time being you’re still entitled to what the government has stashed on your behalf over the course of your life. So at least for now, the dilemma is not if you’ll receive the payout to which you’re entitled but rather when you should take it.
If you retire earlier than age 70, you may need the money to get by in your golden years. But is taking your Social Security early the best bet?
These pros and cons will help you decide what the right decision is for you:
Cons of taking Social Security Early
You won’t receive the maximum amount to which your entitled
The major problem with taking your social security before full retirement age is that you’ll receive a smaller benefit based on the number of months you took it before reaching that milestone — and that can result in a significant cash reduction.
You’ll miss out on future opportunities to increase your Social Security benefits
By taking Social Security early, you’re locked into that decision and all future increases will be based on the initial lower amount.
You may inadvertently ‘cheat’ your spouse out of benefits
You may be giving up a decent sum of money for your spouse if your earnings are not maxed out — and you pass away first.
“The surviving spouse receives the higher of their own benefit or their spouse’s benefit,” says Gary M. Shor, vice president of financial life planning at AEPG Wealth Strategies. “This would be especially painful if the surviving spouse with the lower benefit lives a long life.”
You may be taxed on your Social Security if you take it early and still earn a decent income
Social Security becomes taxable when your income reaches a certain threshold. Enrolled agent Jeffrey Schneider offers a quick way to determine if a taxpayer must pay taxes on those benefits.
“Add one-half of the Social Security income to all other income, including tax-exempt interest,” he says. “Then compare that amount to the base amount for their filing status. If the total is more than the base amount, then some benefits may be taxable.”
The three base amounts are:
- $25,000 — if taxpayers are single, head of household, qualifying widow or widower with a dependent child, or married filing separately and lived apart from their spouse in the previous year.
- $32,000 — if they’re married filing jointly.
- $0 — if they’re married filing separately and lived with their spouse at any time during the year.
Schneider adds, “It must be noted that no more than 85% of the benefits received are ever taxable.”
Pros of Taking Social Security Early
You’ll avoid going into debt if you’re strapped for cash
The most obvious reason for taking Social Security early is that you need the money if you find yourself retired or otherwise out of work before you’ve reach your retirement savings goal or the maximum-benefit age of 70. It may not be the best-case scenario, but if these payments can help you stay out of debt, it’s a no-brainer. Of course, you can also lessen your debt burden by downsizing to cut as much fat as possible from your budget.
Married couples can live more comfortably with smart decision-making
If you’re married and one of you retires earlier than the other, you can supplement that lost income by taking that partner’s Social Security early — while holding out for the fuller benefits of the other’s.
“It may be beneficial for the lower-income spouse to collect early, while growing the other spouse’s,” says Erin Ansalyish, director of financial services at he Prosperity Consulting Group in Baltimore. “Then once the other spouse collects theirs, the lower-income spouse can take the spousal benefit, assuming it’s higher than what they’re currently taking.”
If you don’t ‘need’ the money, you can use the additional income at your leisure
This scenario supposes that you have saved aggressively for retirement so that you don’t have to rely on Social Security once you call it quits at work. In that case, there’s no real downside to taking Social Security early. However, it will provide you with additional cash for discretionary expenditures such as vacations, charity donations, and gifting money to family or friends.
If longevity isn’t on your side, it may pay to take what you can get now
If you have no surviving spouse or children who qualify for Social Security survivors’ benefits when you die, your money reverts back to the Social Security trust fund.
“One thing to keep in mind about Social Security is that it’s not an asset you can pass on to your beneficiaries,” explains financial planner Andy Yadro, of Googins Advisors. “If you’d like to leave a legacy and don’t have longevity on your side, it might make sense to take Social Security earlier, and hold off on tapping into your retirement savings until later on.”
Photo Credit: DonkeyHotey
Great post Len Penzo. Its hard to know one’s decision when they may be 5-10+ years away from being eligible for SS income, but most should find comfort in building their retirement war chest early on enough in life will at least give them options for in this decision.
If I may point out two important takeaways:
1) Social Security income is not necessarily an entitlement program’ moreover a “pay as you go”.
2) Folks taking Social Security income need to be mindful of other retirement income that may push them over the Social Security thresholds for taxing 85% of their Social Security income. In 2017, individuals who make > $35k and married, filed jointly who make > $44k will have 85% of their Social Security income tax by the Fed. Make you re-think tax-deferred accounts vs. tax-free growth accounts.
I posted “My Social (in)Security Complex” where I talk about a view of how SS will increase payroll taxes in the future and how you should be shifting money into tax-free accounts (pay tax now at a lower rate). See here: http://www.mymattressmoney.com/my-social-insecurity-complex/
It’s a great topic to debate and keep in front of you because it has multiple impacts in one’s life (economical, political etc).
Thanks for sharing. For me and my wife, we don’t even think about SS. Even though most likely we’ll received something, it’s so far away that we’re planning on as if it won’t exist 40+ years down the line.
Ditto, Tim. Although I suspect my retirement date is bit closer than yours is!
Tim/Len,
I fully support your thinking. If anything, it will either wind up being FU money or a tax-free gift while I am alive. That would be a great spot to be in.
My husband has a very serious health issue and has a family history of people dying early — his own large birth family has all passed on except for him, one dying as young as 58, while the one who lived longest was only 72 at death. The business he was working for shut down as he was approaching 60, and expenses both for his health and to keep us going wiped out his retirement savings, which were admittedly too small, but he’s made a low income most of his working life with no company retirements or 401Ks, so it was hard to save a lot. To him, it was a no-brainer to take early SS while I continue to work to increase my benefits and grow my own retirement fund as long as I can. I plan to take SS as late as I can plus sock away what I can for whatever the future holds for us. We see the cons to what he’s done, but he really feels he will never get all of his SS anyway, so that’s the choice he’s made.
I fully understand, JD. My retirement planning has always assumed that Social Security wouldn’t be available for me, which is why I plan on taking my SS check at the earliest opportunity — although I doubt it will be available when I retire. The bottom line for me is that there will be no reason to wait for the maximum SS payout if I’ve saved enough to get by without it.