The Social Security retirement and survivor trust fund is currently projected to deplete its reserves in late 2032 if lawmakers don’t act. So, what if you were planning to delay claiming Social Security retirement benefit, and now you’re feeling anxious?
If your primary reason for claiming Social Security early is the fear of future benefit cuts, rushing to claim might backfire. The earlier you claim, the lower your monthly income, and those payments can last for life.
Even if across-the-board cuts occur down the road, delaying your benefit—especially up to age 70—might still be helpful and provide a substantially larger monthly payment. Your bigger payment might be cut, vs. already-reduced early benefit being cut further. A higher baseline might be especially important for protecting a surviving spouse, who can inherit that larger payment
Another issue is that we don’t know what lawmakers will do, if anything.Planning to claim early and invest the difference means market risk. But continuing your plan to delay is more likely to bring a government-guaranteed, inflation-adjusted benefit.
Claiming early is not wrong. Doing so might make retirement possible, and it might make you more comfortable spending during your best years. It might even end up being the best financial choice, depending on how the future unfolds, but only time will tell. As long as you’ve evaluated the alternatives and you’re okay with the tradeoffs and risks, that’s what matters most.
For this discussion, we’re primarily evaluating what the highest-earning spouse (or the person with the biggest benefit) should do. The lower-earning spouse’s decision is often less critical, but it can be important.
Key takeaways
- Concerns are understandable, and it can be tempting to get what you can and bank the money.
- Claiming Social Security early solely out of fear of future cuts risks locking in a permanently lower monthly benefit for life.
- If cuts happen, and if they are a straight percentage of your monthly payment, delaying still might provide a significantly bigger monthly payment than taking a cut on an already-reduced benefit.
- Maximizing the higher earner’s benefit is essential for couples prioritizing survivor benefits, as a surviving spouse can inherit the larger payment and live with it for decades.
- Attempting to claim early and invest the proceeds requires taking on market risk during retirement, whereas Social Security provides guaranteed, inflation-adjusted income.
The Math of Benefit Cuts: Why Delaying Can Still Pay More
Assume a worker’s benefit at full retirement age (FRA) is $3,000 per month. This is also known as the PIA. Let’s look at some numbers in today’s dollars.
- Claiming at age 64: The worker get an initial benefit of approximately $2,400 per month. A cut of 22% would reduce that payment to $1,872 per month.
- Delaying until age 70: By delaying, the monthly payment rises to roughly $3,720 per month. After that same 22% cut, the monthly payment would be around $2,900.
Even with identical percentage cuts applied to both scenarios, waiting until age 70 produces roughly $1,029 more in monthly income. For couples with survivor protection is a primary goal—especially when one spouse is significantly younger—that’s a meaningful difference.Video transcript
Video Transcript
If Social Security is in trouble, does that mean you should start taking your retirement income sooner than later? And that’s especially a question for people who might have wanted to wait until age 70 to start taking their income.
And that makes sense because if there is a cut to payments, then maybe you could start taking your payments sooner, take the money, put it into the bank or some investments, and that way you have more to work with if you start getting smaller payments down the road.
This has been in the media a lot. I’ve been having some conversations with clients about it, so that’s what I want to cover in this video. I can’t tell you what you should do, and I certainly can’t predict the future, but I’ve been a financial advisor for over 20 years helping people with retirement, and I think at least one of these cases might be interesting for you.
I’m thinking of one couple in particular, and by the way, the concepts aren’t that much different if you’re single. These people don’t need the Social Security income to retire. They have enough other assets, and the survivor benefit is important to them. There’s a spouse that’s 10 years younger, and the working client, the one with the income and the biggest Social Security benefit, wants to stop working pretty soon here at age 64. Obviously, I’ve scrambled multiple details here so you can’t tell who it is. So here’s what we discussed when they asked about the headlines about Social Security being in trouble and why they’re not going to claim any earlier than they were going to.
Now, claiming early is not bad. If you have other reasons for doing it, that may make perfect sense. It might be that you need the cash flow to retire, or maybe those payments will help you actually spend money and enjoy your best years. I have no objection to anything like that as long as it doesn’t hurt you financially. But if your only reason is because of the concern about future benefit cuts, then that’s what we’re going to focus on now.
There are two primary reasons that this couple in particular, and another one I can think of off the top of my head, are not going to claim any earlier than the original plan.
The first one is that if there are cuts to your Social Security payments—you know, just the basic nothing happened, nobody fixed anything, so there’s that 22% cut across the board—then I think I would rather see a cut from a higher benefit payment, a higher monthly income, so it comes down, versus starting with the lower income and that gets cut even further. Especially with that younger spouse in the picture, it is highly likely that she is going to take over that payment as a survivor benefit, and that could last for decades.
So right about now, the worker, age 64, could get about $2,400 per month if he just goes ahead and claims. But if he delays until age 70, the amount’s going to be $3,720. And remember that the surviving spouse can step into, or essentially take over the bigger payment and have that for the rest of their life. So a bigger payment is obviously going to seem helpful each month if you are the survivor in that situation.
But let’s say that there are actually some cuts, and so the payment at age 64, if there’s that 22% cut, would go from $2,400 a month to $1,872 per month. And if he delays until age 70, we have that same 22% cut, the amount would go from $3,720 per month down to $2,900-ish. So even if these cuts happen, that’s a difference of about an extra $1,029 for the survivor each month for the rest of her life. That’s with both of the benefits cut the same amount.
Now, that alone does not prove that delaying is always the right answer. We’re going to look at some numbers in a minute here, or another tool, but if you are prioritizing the survivor benefits, then that’s good to know.
The other reason that this couple is not going to claim earlier is that we don’t know if these cuts are actually ever going to happen. There are a number of different ways that the Social Security system could be addressed. I’m not sure if any of them will happen, and I’m not saying that any of these are the right or the best solution. But instead of just saying everybody gets a cut of 22%, it is possible that only people over a certain age face those cuts. Or maybe people in their working years pay higher or different taxes. Maybe more of your Social Security income becomes taxable. Maybe they tweak the inflation calculations for how they adjust payments over time, and that can make a little difference. Maybe there’s a big combination of all of these different changes. Maybe they look at how much assets you have.
So we just don’t know what’s going to happen, and if you make a bet essentially that you know what’s going to happen, you might be making the wrong bet and locking in a much lower payment for life. But it might pay off for you, I can’t say.
What I think is best is to look at some numbers. And so what we have here is a tool from Income Lab. This is the basic inputs, and it’s going to show us some version of the expected lifetime benefits, with some tweaks if you claim at different ages. And in this case, it is suggesting that the worker, the higher earner, claim at age 70 and the spouse claim at age 67. Presumably, that would be right at her full retirement age so that she can get the full spousal benefit, the maximum spousal benefit until he passes.
And by the way, this longevity is maybe a little bit long. So let’s have him last only until age 86 and see if that’s going to change anything. And she is expected to go until age 94. So no changes to his claiming age, although it does have her claim a little bit earlier because she doesn’t have to wait as long to switch to the full survivor benefit. So they’re going to have her claim at age 65.
But the main question here is, you know, does he start earlier than age 70 given these concerns about potential cuts? So that’s the baseline. He starts at age 70 because we want to maximize the survivor benefit because she is 10 years younger than him. So let’s go ahead and turn on a reduction of 23% in the year 2033 and see what happens. Is that going to suggest, ‘Oh no, he should definitely claim sooner’? And in this case, there is not really a case for him claiming any earlier because, again, the survivor benefit.
But you might say, ‘I can take the money, get it early, invest it, or leave my funds invested, and that way I come out ahead versus waiting all of those years to take benefits that might be cut down the road anyway.’ So we can also apply an opportunity cost here. So that gets at this question of, well, what if I want the money sooner? That might be just because you want to enjoy the quality of life. It might give you more permission to spend. It might be because you think you will have the money invested and doing better that way.
So we’ll start out here with 2% as an opportunity cost or a discount rate, and this has a lot of debate. What is the right number? And depending on who you ask and how they look at it, they can make a very compelling argument for one thing or the other. By the way, if I put in 2% here, that does not mean I think you’re going to get 2% on your investments. In this case, it did make a change to when she claims, or the lower earner claims. That made it age 62. So it said, let’s go ahead and start getting her benefit as soon as possible because we think there’s a benefit to having that money, not waiting to get those payments. But his does not change.
So here we have both a reduction and an opportunity cost, and maybe I can bump that up to 3% and see if his age 70 is going to change. Again, that’s the main thing we’re asking about here is, given the potential for some cuts, does it still make sense for him to delay until age 70 for that survivor benefit? Still no change there.
I’ll go up to 4%, and maybe even keep going if we have to. And here’s where it starts to say maybe it does make sense for him to claim a little bit earlier. So we’ve got a combination of a cut in benefits, just across the board, both of them get their benefits cut, you know, and that lasts forever, and then there’s also a decent opportunity cost here.
Again, this doesn’t mean that I think you’re going to earn 4%. The way I think of this is whatever that number is, you would need to get a few percent above that, which is not guaranteed, of course. And I don’t know if that’s the right number, you know? You will have to decide what you think makes sense. Typically in a case like this, we’re talking about a relatively compressed number of years when you are at retirement age. Generally not the most aggressive stage in life for many people. So you would want to evaluate during those years, am I going to get some nice returns, and am I comfortable with any amount of risk that I have to take to do that?
Again, it’s not something that I can answer for you in a video like this, but if you’re thinking you will just invest the money and come out ahead, and that money that you bank or invest is going to be for your spouse’s protection, I would say maybe chat with your spouse about that and see what they think. Because they might want to consider other options. Remember that, you know, Social Security is an inflation-adjusted, government-guaranteed form of payment. Or your spouse might be perfectly happy letting the investments ride.
Now, for these clients, investing was not the answer. There are a number of different ways to think about Social Security, not just maximizing the dollars you’re going to get, but other goals. And the video popping up now should show you some of those other things to consider as you make this important decision.
I hope you found this helpful. If you did, please feel free to check out my website, maybe send me an email, and I’ll see you in the next video.