The U.S. economy has made modest gains recently. Consumer confidencerose during the fall, and the stock market has stabilized. Meanwhile, employment appears poised to pick up, and even the housing market is showing glimmers of a turnaround.
But the gains haven’t been enough to make a dent in many people’s long-term pessimism, and their faith in financial institutions has eroded. One such institution is Social Security . In fact, many people now wonder aloud if it will be around much longer.
The idea of Social Security’s insolvency is chilling. Terms like “imminent default” strike fear into the hearts of those who’ve paid into it. The fear is now causing some to ask a once-unthinkable question — should I claim Social Security benefits early? After all, if the tidings are as dire as they say, maybe people should grab what they can before it’s too late.
Financial advisers differ on the severity of the situation, but not on what course of action to take: Don’t do it.
Nicholas Oleson, a private wealth manager from Philadelphia, believes there are three very good reasons to avoid claiming Social Security — penalties, penalties and penalties.
“The penalties for taking it early are huge and cannot be ignored,” Oleson says. “If someone born in 1960 decides to take it at 62 instead of waiting for 67, they give up 30 percent of their benefit and have almost no way of getting it back. I would also recommend retirees think about the probability of the government getting rid of these benefits altogether. The more likely outcome is a reduction based on other income sources or a higher tax. These will not be stopped by taking it early.”
Keith J. Weber, a former financial adviser and author of the book “Rethinking Retirement,” believes anyone 62 or over should relax. “While Social Security is currently operating in the red, it does have a ‘trust account’ that will allow it to continue to pay benefits through 2035, meaning those who are age 62-plus now should have no immediate concerns that it will go away.”
On the other hand, Weber believes younger people have cause for concern.
“Those who are not currently eligible, especially those younger than age 55, should be very concerned about the amount they will eventually receive, but not necessarily whether it will be there or not,” he says. “Politicians are not likely to have the courage to significantly change or eliminate the program for current recipients. But because of the unsustainable nature of the current formula, they will eventually be forced to make changes for future beneficiaries.”
Elle Kaplan, CEO of Lexion Capital Management, says that not only should you avoid claiming Social Security early, but you should actually show up late to the party. “I recommend that my clients delay filing for benefits if they can afford it,” says Kaplan. “For each year you wait to collect a benefit you will get an increase in benefit.”
“Let's look at ‘Jane,’” she says. “If her full retirement benefit at age 66 is $1,000, she would receive approximately $800 per month if she chose to claim at 63. By waiting a year, her benefit would increase to $867 per month, and for each year after she’s 66 that she delays filing, ‘Jane’ gets an 8 percent increase per year. Her monthly benefit amount will grow if she delays taking it. That adds up to a very big difference for the rest of her life.”
While it’s understandable some people would panic amidst the rumors of Social Security’s demise, financial experts are clear that you should delay. Doing so will ultimately give you far more peace of mind.
“If you live longer than expected, you have now decreased your risk of running out of money, and if fate has it that you don’t live longer than expected, well, you didn’t need the money anyway,” Kaplan says. “Choose the financially safer route of a delay over the potentially sorry route of early benefits.”