Your estate plan is (or should be) closely connected to your wealth and retirement plans. Why? Your wealth plan can influence the amount of funds available during your retirement, and your retirement plan will affect how much of your estate will be left to pass on to your family after death. A factor to consider among all of this planning is when to begin receiving Social Security benefits.
Understand the impact
You can begin receiving Social Security benefits as early as age 62 or as late as age 70. The longer you wait, the higher the monthly benefit. This is because the system is designed to provide you with roughly the same total benefit (based on government life expectancy tables) regardless of when you begin receiving payments.
If you start benefits before your “normal” retirement age, you’ll receive a smaller check over a greater number of years. If you start later, you’ll receive a larger check over a smaller number of years.
Determine the breakeven point
A useful tool for choosing the right starting age is to calculate your breakeven point. For example, Scott, who is retired, is about to turn 62. He’s trying to decide between taking a reduced Social Security benefit right away or waiting until his normal retirement age of 66. Let’s say Scott’s full monthly benefit at 66 would be $2,000 and his reduced benefit at 62 would be $1,500.
Ignoring cost of living adjustments for simplicity, Scott’s breakeven point is just before his 78th birthday. At that point, his total benefits will be about the same whether he starts at age 62 (192 months × $1,500 = $288,000) or at age 66 (144 months × $2,000 = $288,000). If Scott lives to at least age 78, waiting until age 66 to start collecting will provide him with greater lifetime benefits. If he doesn’t reach that age, he’s better off starting at age 62.
Let’s suppose that Scott’s father and grandfather both lived to be 90. If Scott follows suit, he’ll receive $72,000 of additional Social Security benefits by waiting until his normal retirement age of 66.
After determining your breakeven point, the right choice for you depends on several factors, including your actuarial life expectancy, your health and your family history. Also, keep in mind that the above example doesn’t consider potential earnings on Social Security benefits. If you plan to invest your benefits, you may need to adjust your breakeven point upward or downward, depending on your expected rate of return.
There are many variables to considering the question of when to begin receiving Social Security benefits. Your wealth, retirement and estate plans will affect the answer. Your estate planning advisor can be a valuable resource in this process.