4 Reasons You May Not Want to Delay Social Security Payments

Most people have been trained to delay collecting Social Security for as long as possible so that they can receive the maximum amount owed to them. After all, if they hold out until age 70, the size of their benefit will be significantly larger than if they started collecting at their full retirement age or age 62, the earliest age you can get Social Security benefits. That’s because under Social Security Administration rules if you were born in 1943 or later and delay collecting Social Security benefits beyond your retirement age, you’ll see an 8% annual increase each year until age 70. However, there are instances when delaying doesn’t make that much sense. (Read Tips on Delaying Social Security Benefits.)

Retirement can easily last more than 20 years if you're a healthy senior, but unfortunately, many people develop illnesses as they age. If you are in poor health, you may need the extra money that Social Security affords you and, as a result, opt to claim benefits early. And, sadly, if you think you may not live to be very old, you will end up with more money if you start claiming sooner. (Read more in Planning for Healthcare Costs in Retirement.) 

If you wait until age 70 to claim Social Security benefits, you will see an 8% increase each year past your full retirement age until you reach 70. That means if you are 67 and wait three years to claim benefits you’ll get 8% more per year. But if you are a savvy investor and think you can outperform your return by delaying Social Security benefits you could start claiming early or at full retirement age, take the money and invest it yourself. The idea would be to see that money appreciate more than if you had waited to collect it.

There are risks associated with this strategy. After all, unless you have a crystal ball you have no idea how the markets will perform. Have a bad year and it can wipe out any gains as well as your principal investment. That’s not bad when you are young, but in retirement you are already living off a lower income stream than in the past, so you are going to want to preserve cash as much you can. (Read more in, 4 Unusual Ways to Boost Social Security Benefits.)

In the first stage of retirement, many people are still healthy, have a lot of energy and spend more money on hobbies, travel and other entertainment. As a result, lots of newbie retirees need increased cash flow during the earlier years of retirement and less as they get older. If you fall into this category and want to boost the amount of cash you have now, it can make sense not to delay collecting until you are 67 or 70. Sure, you will have a lower payout than if you delayed, but if enjoying your retirement when you are still healthy is more important than collecting Social Security at your full retirement age or beyond, taking the money sooner is going to make more sense.

If it turns out you don’t need the money, taking Social Security early can benefit your heirs if you gift the benefits into a life insurance trust, says Jonathan Swanburg, CFP, of Tri-Star Advisors in Houston, Texas. “This way you are still in good enough health to obtain a life policy and your heirs may be able to receive the insurance proceeds free of income tax and estate tax, regardless of your longevity.”

Social Security is one of those benefits that is supposed to be around forever, but Social Security benefits may change in the future, which worries people of all ages. While older people – particularly ones nearing the retirement age – worry about the fate of Social Security, they won’t see much if any impact to how much they receive. That may not be true for people entering the workforce today. For older workers, though, Social Security will be around in some form by the time they retire. (Read more in Why Is Social Security Running Out Of Money? and How Secure is Social Security?.) Even so, if the thought of losing out on Social Security benefits is keeping you up at night, it may be better to start claiming early or at full retirement age than to hold off for an increased benefit. 

When to start collecting Social Security depends on each retiree's unique situation. The longer you wait to start collecting the benefit, the more you stand to receive. But if your health is failing, if you need more cash in the early years of retirement, or if you are worried that Social Security will go away, claiming early or at your full retirement age may make sense. Ultimately, when you are deciding when to collect your Social Security benefits, you need to figure out how much money you will be leaving on the table and whether it is worth it based on your unique situation.