It is critically important to be able to competently and persuasively answer a question, one that so many individuals approaching retirement or in retirement routinely ask:
"When is the best time to start taking my Social Security income?"
The answer, in most cases, is very simple: Take as much Social Security income as you can, as soon as you possibly can.
Myth No. 1: If you wait, you get more.
The older you are when you start, the more Social Security monthly income you receive. The Social Security Administration thus entices people to wait longer. But let's look at this a little deeper.
Let's use an example. Assume at age 62 a person's Social Security monthly income will be $1,000 per month. However, if they wait until age 67, this monthly income increases to $1,500. More is better, right?
Remember that in order to get this extra $500 per month, this individual had to wait five years. So if we calculate the income this person did not receive, it comes out to $60,000 ($1,000 per month for five years).
The proper thing to do in this example is analyze the pros and cons of waiting five years for the extra $500 per month.
Using the example, the pros are simple. Waiting earns you an extra $500 per month, which is a good thing.
Now let's take a look at the cons. How many months does it take someone to simply break even (from a financial perspective)? Well, if you divide $60,000 (lost income) by the $500 (additional income), it comes out to 10 years.
However, the story does not end here. Remember, by waiting five years this person is now 67 years old. Therefore, in order to accurately calculate the lost income and "break-even" point, you also have to add in the five years this person waited (from age 62–67). Therefore, it really takes this person 15 years to simply break even and justify deferring their Social Security income.
But wait, there's more …
Some other key factors to consider are:
- Five years of potential lost interest or growth from the monthly income
- Five years of lost ability to spend and enjoy the extra monthly income
- Countless years of lost income due to a possible critical illness
- Countless years of lost income due to a possible premature death
- Countless years of lost income due to an unexpected illness or death of a spouse
- Countless years of reduced purchasing power as a result of inflation
- Countless years of lost income due to the potential for taxes to go higher
- Countless years of lost income due to potential reductions, changes, or even the elimination of Social Security income
MYTH No. 2: My income and taxes will be lower in retirement.
Far too often individuals, couples, and financial professionals make major mistakes as a result of basing a financial decision upon its tax consequences. (Note: For the sake of brevity, I will not go into the various ways (and rates) at which Social Security income can be taxed.)
Most of us have heard the argument, "I will be in a lower tax bracket when I retire." This statement never ceases to amaze and disturb me for several reasons. First, why do so many aspire to have a significant income reduction once they reach retirement? Retirement is commonly referred to as the Golden Years, right? This implies that you worked hard and long enough to have saved enough gold to live like Kings and Queens.
