How would you like to make a guaranteed 5% to 8% on an investment? There is a way to do that, but it’s not without risk. The way is delaying your application for Social Security until your full retirement age (FRA) or later. For most of us, our full retirement age is from 66 to 67. Here’s a chart that lists Social Security full retirement ages:
Before 1938: 65
1938: 65 and 2 months
1939: 65 and 4 months
1940: 65 and 6 months
1941: 65 and 8 months
1942: 65 and 10 months
1943 – 1954: 66
1955: 66 and 2 months
1956: 66 and 4 months
1957: 66 and 6 months
1958: 66 and 8 months
1959: 66 and 10 months
1960 and later: 67
You would have to be even older than me (gasp!) to have a FRA that was younger than age 65.
If you’re planning on retiring at age 62 or younger, and on taking Social Security right away at age 62, then your monthly Social Security payment will be quite a bit smaller than it would be if you waited until your full retirement age, or even to age 70. If you elect to apply for Social Security at an age earlier than your FRA, your benefits will be reduced.
Your benefits will be reduced 5/9 of 1% per month for the first 36 months you apply for your SS prior to your full retirement age. That’s 6 2/3% per year. Your benefits will be reduced 5/12 of 1% per month for all months you apply for your SS in excess of 36 months in advance of your FRA. That’s 5% per year.
If your FRA was 67 (as I bet it is for most readers of this article), your benefit would be permanently reduced by:
6.67% if you took it at age 66.
13.33% if you took it at age 65.
20% if you took it at age 64.
25% if you took it at age 63.
30% if you took it at age 62.
On the other hand, you can earn delayed retirement credits of 8% per year up to age 70 by choosing not to collect your Social Security benefit until after you reach your FRA. If your FRA was 67, you could increase your benefit by 24% by waiting until you reached age 70.
But this strategy is not risk free (despite the fact that I used the word “guaranteed” in the first sentence of this article). In opting to delay your benefits, you are running the risk of not collecting as much (or even collecting anything) if you die before you “break even” (or before you even apply). Because of the different percentages used to calculate your reduction or increase, there is no one-size-fits-all break even period. But a common yardstick for the break even point is 12 years. Do you think you’ll live another 12 years after your FRA (or after age 70)? Then maybe delaying your Social Security makes sense. Do you think that you’ll die at a younger age? Then you probably want to grab your Social Security as soon as you can. I delayed applying until I was 69 years and 3 months old. When I was being wheeled into the OR for open heart surgery back in March, I wondered if I had made the right choice. Not really – I was heavily sedated and Social Security was the last thing on my mind at that time.
So, why is an article on Social Security appearing in a newsletter that is dedicated to the Thrift Savings Plan and other retirement related investments? Because, if you choose to delay receipt of your Social Security, you will need to have income to support your retirement lifestyle coming from somewhere and, if you don’t have other money stashed somewhere, the source of that retirement income would be your TSP account.
The topics we’ve discussed above bring to light the fact that nothing in life is certain. Our FERS (or CSRS) annuity is certain – as is Social Security. We can estimate our income from the TSP. But there’s not a single one of us who knows when we’re going to die. We have to make the best possible decisions based on the information we have on hand and hope for the best. Going back to my example, now that I’ve recovered from my surgery and feel better that I have for the last decade, I think that my decision to delay Social Security was the right thing to do. But I haven’t “broken even” yet and you never know.