Taking Social Security: The Early or Late Debate

If you are in your late 50s or early 60s, when to take Social Security (SS) benefits is probably on your mind. As you approach age 62, it is a good time to review your situation. And if you are married, you’ll want to explore the optimum choice as a couple. RCG can help.

SS options are designed to break even

Think of Social Security benefits as a pension plan of sorts. You have a variety of options: take the money early, take it at full retirement age (FRA), or take it later – up to age 70. The longer you wait to take benefits, the greater the monthly benefits. Once you begin taking benefits, they will increase with inflation each year.  Following 2022 Social Security Administration (SSA) benefits increased by 8.7% due to high inflation.

In 2025 for someone 65 years old, SSA uses an average life expectancy of 84 for a man and 87 for a woman.  Actuarially, you would “break even” if you took Social Security at your full retirement age (FRA) and lived to the exact age of life expectancy. So, if you think you will live BEYOND average life expectancy, you will be better off waiting to start benefits. Inversely, if you expect to die BEFORE average life expectancy, you should consider taking your benefit as early as possible. But there’s more to consider – of course.

When Social Security was first created in 1935, the average life expectancy was 61 for men and 65 for women.  And full SS benefits didn’t start until age 65 – ouch!  

For 2025:

• The maximum benefit at your Full Retirement Age (FRA) is $4,018
• The maximum benefit if you wait until age 70 is $5,108

Are you still working?

You may start collecting SS benefits at age 62. But if you do, then you are considered retired by the Social Security Administration.  And, if you earn too much, SSA will take back $1 of SS benefits for every $2 earned above $23,400 in 2025. But, in the year you reach your full retirement age (FRA), you can earn more and only must repay $1 for every $3 earned above $62,160 prior to your birthday.

Once you reach your birthday at your FRA, you can earn as much as you like the rest of the year and keep ALL your SS benefits.  And, if you keep working beyond FRA, and your earnings are higher than some of your prior earning years, then SSA will recalculate your benefits using the new highest years and your benefits will be increased along with inflation. 

Should you let benefits grow beyond full retirement age?

If you are in good health or have a history of longevity in your family, you’ll be interested to know that for every year you wait beyond your FRA (up to age 70) your benefits will increase by 8% per year.  In addition, they will also grow with inflation each year. Combined, that is an automatic risk-free return of probably 10% or more.  This return rivals top market performance, so give it serious consideration if you expect to live beyond normal life expectancy.

The potential downside of waiting beyond FRA age is you’ll have to get cash flow from some other source while you wait to collect.

If you are married and have a higher earnings history than your spouse, it is likely that waiting until age 70 will increase your spouse’s survivor benefit. This is valuable if you were to die first and your spouse has long life expectancy. And if you both have long life expectancy it will likely increase your overall benefits as a couple by having the high earner wait until 70. 

Be aware of your tax situation during the transitional time in your 60s and 70s

While you are still working, you are probably in a higher tax bracket than you’ll be in retirement.  Up to 85% of SS benefits are taxable. So, waiting until after retirement to collect SS benefits could result in the double advantage of receiving higher SS benefits (since you waited) and possibly having those benefits taxed at a lower marginal rate.  More for you and less for the government.

You aren’t required to begin taking required minimum distributions (RMDs) from your IRA until the age of 73 (or even age 75 if you were born in 1960 or after). So, while your tax rate might be a little higher once you are retired and collecting SS benefits, it still may be lower than it will be once you start RMDs.  Required distributions start out around 4% of your IRA value; so, a $1 million IRA would add $38,000 of income to your tax return in the year you turn 73 and a $3 million IRA would add $114,000 of income.

If you do have lower tax years prior to age 73 (or 75), you might be able to sell appreciated investments and pay no or little capital gains tax. You might be able to convert limited amounts of your IRA to a Roth each year at low tax rates.

Again, RCG can help. Awareness of your specific situation will help make the most of tax opportunities.

How strong are your overall financial resources?

As mentioned above, SS benefits are a form of longevity insurance because they increase with inflation, and they are backed by the US government.  If your overall financial resources are LIMITED or come with uncertainties, you should take care to maximize the individual worker benefits and the survivor benefits from Social Security as much as possible.  And you may want to work longer – both for cash flow and to improve your ultimate SS benefits.

In contrast, if you have an abundance of additional resources and are likely to leave wealth to your heirs, you may be more inclined to take the SS benefits early. Social security benefits end when you and your spouse are both gone.  But investment assets can be inherited and thus have more value to your heirs.

• Heirs can typically stretch tax-deferred investments over ten years. And heirs are often in a lower tax bracket than their parents.
• Investments owned outside of tax-deferred accounts will get a step-up on the tax basis. Thus, heirs can sell any investment immediately upon inheritance and pay no tax. Or they can continue to own the investments and pay only capital gains tax on whatever appreciation occurs during their ownership.

Watch out for reductions in benefits

The next time you look at your Social Security Statement, you may notice this comment on Page 2 with an asterisk right below the “Your Estimated Benefits” section, and we quote:

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefits amounts may change because, by 2035, the payroll taxes collected will be enough to pay only about 80 percent of scheduled benefits.

There are many examples of past changes in the SS law that are effectively a “back-door tax” on wealthier taxpayers.

• At first, SS was not subject to taxation at all. Later, up to 50% was taxable. Since 1993, up to 85% is now taxable.
• In 1983 Congress passed a law to gradually increase the full retirement age for Social Security from 65 to 67 as part of the attempt to sustain the benefits.
• The calculation of the cost-of-living adjustment is based on CPI-W. This index tracks monthly changes in goods and services for urban wage earners and clerical workers, representing only about 32% of the US population. Proposals have been made over the years to change to a more relevant index for retired individuals, but that hasn’t happened.

So, where’s the wisdom?  What matters most?

While you will collect more in SS benefits by waiting and living beyond normal life expectancy, you won’t even see that benefit until you are near or over 90 – – having lived 5 to 7 years beyond normal life expectancy.  On top of that, if one of you lives to around 95, the cumulative benefit is surprisingly small – perhaps in the low 6 figures at best.

So rather than have you both wait to take SS, it usually makes sense for the high earner to wait until FRA, and probably until age 70 to capture the highest survivor benefit.  This strategy is especially valuable when the lower earning spouse is much younger.  And it protects the younger, lower earning spouse if the high earner dies at or before life expectancy. 

For the low-earning spouse, the value of waiting beyond FRA typically has little value. They should consider collecting at 62 or wait until FRA at the latest.

When you have ample resources, or you’re pessimistic about future SS benefits, or back-door taxes, or have health issues, you may want to choose the “bird in the hand” and start collecting SS sooner. The only caveat being to wait until the younger spouse is eligible for Medicare.

How to get help from RCG

Obtain a recent copy of your SS benefits statement and your spouse’s by visiting www.ssa.gov and click on the button for My Social Security. Create a username and password. Then print or save the report and send it to RCG. If you have a freeze on your credit, it may be more challenging to create an online account.

This is a surprisingly complex decision.  Let us know if you want to discuss this at your next regular meeting or have a special meeting. We’ll analyze and review your potential options and help you make the best decision given your circumstances. It’s just one of the ways we hope to add value and clarity to your financial well-being.

Sources:

1. https://www.ssa.gov/oact/cola/latestCOLA.html
2. https://www.schwab.com/learn/story/guide-on-taking-social-security
3. https://www.nstp.org/article/secure-act-2-0-%E2%80%93-when-does-the-rmd-start#:~:text=The%20beginning%20age%20for%20RMDs,born%20in%201960%20or%20later.
4. https://money.com/social-security-cola-cpi-e/
5. https://smartasset.com/retirement/is-social-security-income-taxable
6. https://bipartisanpolicy.org/explainer/full-retirement-age/