Most financial advisors you’ve come across with probably told you to take your Social Security at 70. However, Mark Hubert’s recent Market Watch column entitled “It Might Be Better to Take Social Security at 66, Here's Why,” implies that you might be making a big mistake. The reason mainly is that Social Security is broke and Uncle Sam may cut benefits. He specified that benefits will have to be cut by 23 percent absent payroll tax increases or other sources of additional Social Security finance as soon as the system’s trust fund runs out of money.
It’s safe to say that Mark is correct when he said Social Security is broke because it’s red ink totals $34 trillion. This amount is double the official debt reported by the Congressional Budget Office.
It makes more sense for future retirees to take their benefits early, say at 66, as concluded by Mark Hubert. However, for current and near-term retirees, this could be terrible advice. Here are the reasons why:
Since Social Security is still positioned as the third rail of politics, any politician advocation direct benefit cuts will like be committing political suicide. Democrats are obviously in control and will likely keep the House for the next years to come which could mean the prospect for direct benefit cuts is remote. The Social Security benefit taxation may be raised by the Democrats either directly or indirectly, but when it comes to cutting benefits, it’s close to impossible.
There’s a higher chance that benefit cuts will not be visited on those already collecting benefits or on those about to begin collecting in the next decade for instance. The elderly subsists on Social Security is roughly one fifth and the main source of financial support for roughly half.
When calculated, even those who are expecting to a 23 percent benefit cut beginning in 2034 could lose thousands of dollars by filing before they reach the age 70. This is under the assumption that collecting at age 70 would otherwise increase their lifetime benefits.
Let’s take a look at the case of a single man, name Dana, 58 years old. He started working at 22 with an income of $30,000. As the years passed by, Dana’s earnings grew by 3 percent per year. He is now making close to $85, 000 and he plans to continue earning the same until he retires at age 65.
At the age of 62, if Dana takes his retirement benefits, he will have a lifetime benefit with a present value of equal to $818,747. If he waits until he reaches his full retirement age (FRA) which is only ten months after he turns 66, they will total $849,678. Now if Dana waits until he’s 70, he can expect a total of $ 950,698-lifetime benefits. As you can see, he will receive $131,951 more than taking benefits at 62 and $101,020 more than taking benefits at 66 and 10 months. His situation is a perfect example of how patience pays off in the end.
But what will happen if benefits are cut 23 percent beginning 2034? How will this affect Dana and others who are already collecting? This makes the gains from waiting to 70 smaller, but still significant. The present values of lifetime benefits from filing at 62, at FRA, and at age 70 are now $678,124, $700,084, and $764,084, respectively. Consequently, the gain from waiting from 62 to 70 is $85,960. If you're waiting from 66 to 70, the gain is $63,300. Overall, if Dana goes beyond Mark’s advice and decides to file at 62, he will end up losing $85,960. Following Mark’s advice, on the other hand, will cause him to leave $63,300 on the table.
Since Mark sets up a different numerical example he eventually reaches a very different conclusion. He probably did something else but as for the above calculations are a concern, all benefits provisions were carefully incorporated and also allows you to specify future benefit cuts as well as make you see how that affects your lifetime benefit maximizing collection decisions.
Flynn Financial Group Inc