- Public Accounting, Tax and Financial Services since 1957
Social Security
Do I Draw or Defer?
March 18, 2024
Drawing Social Security benefits at the full retirement age (FRA) or deferring until age 70 is a significant decision that can impact one's financial security in retirement. This article explores the advantages and disadvantages of both choices to help you make an informed decision.
Understanding Full Retirement Age (FRA)
The Full Retirement Age is the age at which a person may first become entitled to full or unreduced Social Security benefits. FRA varies depending on your birth year, ranging from age 65 for those born in 1937 or earlier to age 67 for those born in 1960 or later.
Drawing Benefits at Full Retirement Age
Pros
- Immediate Income:
Starting Social Security benefits at FRA provides immediate income. It can be particularly beneficial for individuals who need to supplement their retirement savings or for those who are no longer working. - No Reduction in Benefits:
Benefits are not reduced if taken at FRA. You receive 100% of the monthly benefit amount your earnings record entitles you to. - Medicare Eligibility:
You become eligible for Medicare at age 65, which may coincide with your FRA if you were born before 1960. Drawing Social Security benefits at FRA can simplify healthcare coverage transitions.
Cons
- Opportunity Cost:
By not delaying your benefits, you miss out on the opportunity to increase your monthly benefits. Delayed Retirement Credits (DRCs) increase your benefits for each month you delay beyond FRA until age 70. - Potentially Lower Lifetime Benefits:
If you live a long life, starting benefits at FRA could result in lower total lifetime benefits compared to delaying until age 70, depending on your longevity and financial needs.
Deferring Benefits Until Age 70
Pros
- Increased Monthly Benefits:
For every year you delay taking Social Security benefits beyond your FRA up to age 70, your benefits increase by a certain percentage (about 8% per year for those born in 1943 or later). This increase can significantly boost your monthly income in later years. - Higher Lifetime Benefits for Long-Living Retirees:
If you live well into your late 80s or beyond, the total amount of Social Security benefits received over your lifetime is likely to be higher if you start at age 70. - Larger Survivor Benefits:
If you are the higher earner in a married couple, delaying your benefits can result in a higher survivor benefit for your spouse if you pass away first.
Cons
- Delay in Benefits:
You must have other sources of income to support yourself between FRA and age 70. This delay can be financially challenging for those without sufficient retirement savings or pensions. - Risk of Not Reaching Break-Even Point:
There's a break-even age at which the total benefits received (whether starting at FRA or age 70) equal each other. If you defer until age 70 but do not live long enough past the break-even point, you might receive less in total benefits than if you had started at FRA. - Market and Health Risks:
The decision to delay assumes that you will remain healthy and that any invested savings will grow. Market downturns or unexpected health issues could affect your financial security.
Considerations for Making the Decision
- Health and Longevity:
Consider your current health, family medical history, and longevity trends. If you have reasons to believe you might not live into your late 80s or beyond, starting at FRA might make more sense. - Financial Needs and Other Income Sources:
Assess your financial needs and other income sources. If you need the income at FRA or have other sources that can sustain you until age 70, that can influence your decision. - Tax Implications:
The timing of Social Security benefits can affect your tax situation. Benefits may be taxable depending on your overall income level. Delaying benefits while drawing from other income sources could result in different tax outcomes. - Spousal Considerations:
If you're married, consider how your decision affects your spouse, especially in terms of survivor benefits.
Cons
- Delay in Benefits:
You must have other sources of income to support yourself between FRA and age 70. This delay can be financially challenging for those without sufficient retirement savings or pensions. - Risk of Not Reaching Break-Even Point:
There's a break-even age at which the total benefits received (whether starting at FRA or age 70) equal each other. If you defer until age 70 but do not live long enough past the break-even point, you might receive less in total benefits than if you had started at FRA. - Market and Health Risks:
The decision to delay assumes that you will remain healthy and that any invested savings will grow. Market downturns or unexpected health issues could affect your financial security.
"Deciding whether to draw Social Security benefits at full retirement age or defer until age 70 involves balancing immediate financial needs against the potential for increased lifetime benefits. It's crucial to consider your health, financial situation, and retirement goals. Consulting with a financial advisor can help tailor the decision to your personal circumstances, maximizing your retirement security. Regardless of the choice, understanding the implications and planning accordingly can help ensure a more stable and comfortable retirement."
Gregory J. Cook