In a recent episode of the Talking Real Money podcast, a listener from Bellingham, Washington, posed a question that could significantly impact his retirement finances. Scott, a 66-year-old retiree with a net worth in the low eight figures, no debt, and minimal spending compared to his investment income, was contemplating when to claim his Social Security benefits. Despite having planned to wait until age 70, he became intrigued after watching a video from the “Retirement Nerds” that advocated for claiming benefits as early as age 62 and investing the payments.
However, host Don McDonald firmly advised against that approach. He emphasized that Scott, who comes from a family with a history of long lifespans, could benefit from waiting and receiving a larger benefit at 70. McDonald expressed skepticism toward the video’s argument, suggesting it was designed more to attract viewers than to offer sound financial advice. “I think these guys are looking for viewers because they’re going contrary to conventional wisdom,” he remarked.
Scott’s financial strategy aligns with McDonald’s endorsement to delay claiming Social Security. If Scott were to claim benefits at age 62, he would lock in a monthly check that is about 30% smaller than what he could receive at full retirement age. By waiting until age 70, Scott would not only enjoy a larger monthly payout but also benefit from cost-of-living adjustments that build from his higher benefit amount.
The podcast underscored the importance of understanding Social Security’s delayed retirement credit, which adds approximately 8% to benefits for each year one waits beyond full retirement age. This increase sets a new baseline for future cost-of-living adjustments. For instance, a retiree eligible for $2,000 monthly at full retirement age would receive around $1,400 if they claimed at age 62, but waiting until 70 could yield nearly $2,480 per month before any cost-of-living increases.
Additionally, McDonald pointed out that choosing to claim early comes with significant risks, particularly regarding market performance if the funds are invested. He highlighted the possibility of enduring a downturn early in retirement, which could diminish returns and leave an individual reliant on a lower Social Security check.
A critical factor in Scott’s decision-making is the concept of break-even age, which determines whether waiting to claim benefits is financially advantageous based on life expectancy. In Scott’s case, given his family history of longevity, it is likely he will live well past the crossover point where delaying benefits pays off.
For retirees facing health challenges or shorter life expectancies, the calculations may suggest claiming earlier would be more prudent. Overall, the variables at play include individual health, longevity, marital status, and necessity for income, with McDonald’s commentary tailored to Scott’s situation of relative financial security and expected longevity.
For those grappling with a similar decision, McDonald provided three essential steps to guide the process: pulling personalized benefit estimates at key ages, estimating realistic break-even ages, and considering the implications for any spouses or survivors. He concluded that the 8% delayed credit represents one of the few assured returns left in retirement planning, making it a wise choice for healthy retirees with a history of longevity.
