Q: I'm 66 years old and as my deceased husband's widow, I've been receiving his Social Security benefit for 6 years. Now Social Security tells me I can switch to drawing my own benefit, and receive about $300 a month more than I'm currently getting. However, if I wait 4 years until I'm 70 years old, I'll receive $892 a month more. I calculate that if I wait the 4 years, it will take me 23 months after I turn 70 to break even.
I feel like waiting, but my planner told me to take it now. I know each case is individual, but are my calculations correct? --AA via email
A: Follow your instinct and postpone taking your own benefit until you're 70 years old.
You've actually overestimated how long it will take you to break even. I make it 16 months, not 23 months. Barry C. Picker, a certified financial planner who's also a CPA, confirms the accuracy of my calculation.
Here's how I crunch the numbers:
If you take your benefit now, you'll gain an extra $300 a month for four years. That adds up to $14,400. To find out how long it would take you to collect that $14,400 if you delay your benefit until age 70, and then start it getting $892 a month more, I divide $14,400 by $892.
The result: 16 months.
But my advice would be the same if it took 23 months to break even.
Your Social Security benefit grows a risk-free 8% a year for each of the four years you delay taking it between ages 66 and 70. If you took your benefit now and invested the extra $300 a month for four years, no way could you expect to earn 8% a year on your money -- let alone in risk-free investments! If your financial adviser suggests otherwise, you need a new adviser.
And what's the downside of waiting? True, there's always the risk that just six months after you start your benefit at 70, you're hit by a bus and die. In that case, you will have lost financially.
But the biggest risk most of us face isn't dying early. It's living much longer than we expect. If you're healthy at 66, you're very likely to live well into your 80s and possibly into your 90s. And maybe to 100.
The easiest, surest, and least expensive protection against longevity risk is to maximize your Social Security benefit, a stream of lifetime income that's adjusted annually to keep up with inflation. (It's the cheapest annuity in town, explains Alicia Munnell, the director of the Center for Retirement Research at Boston College.) With a 32% boost in your initial benefit, your annual inflation adjustments are calculated on a much larger amount. The upshot: You'll receive a substantially bigger monthly amount in your later years.
And in your case, it's clear that you won't suffer current financial hardship by postponing your benefit.
"The fact that you've indicated you want to wait means you don’t need the larger benefit now, and are more concerned about the future," says Picker. "You will be more comfortable, from a piece of mind point of view, knowing you have the extra income in your later years."
He recommends collecting your widow's benefit until 70 and then switching to your own.
The clincher: this is a decision you can revisit anytime during the next four years. If you change your mind, you can switch to your own benefit sooner if you feel it's necessary.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
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