Why Waiting to Claim Social Security Benefits Might Cost You More Than You Think

You’ve probably heard that it’s best to take Social Security benefits later rather than sooner. After all, delaying  gratification will get one a bigger paycheck at some point down the road, right?

While the decision to delay, perhaps by as much as possible, is a right move for some, especially those who don’t need the extra cash earlier on in their retirement, I do think that there really is no one-size-fits-all answer when it comes to the “perfect” time to start receiving Social Security benefits.

Key Points

• Forgoing Social Security until later means more cash in the bank later on. An 8% risk-free rate is tough to pass on.

• Still, opportunity costs should play a role in what age one chooses to start receiving benefits.

• Are you ahead, or behind on retirement? SmartAsset’s free tool can match you with a financial advisor in minutes to help you answer that today. Each advisor has been carefully vetted, and must act in your best interests. Don’t waste another minute; learn more here.(Sponsor)

The real cost of delaying Social Security benefits

Indeed, every year that’s delayed up to age 70 will give one an 8% raise. And while an 8% return that’s free from risk is pretty good (actually, it’s very good, especially considering the downside potential of most higher-return risky assets), even though it’s slightly less than the longer-term average return offered by equities, one must also consider one’s own circumstances. At the end of the day, money in the present is worth far more than the same amount of money in the future.

And, of course, the right discount rate is going to vary for everyone. For someone in their early part of their 60s, I’d argue that an 8% increase in the monthly payment for an extra year delayed might not be good enough to justify delaying receiving benefits until later, especially given that one’s health and mobility could take a drastic turn for the worse by the time one has their 70th birthday. So, the real cost of waiting around to start receiving Social Security benefits is the opportunity cost, which may or may not be higher than the additional cash one would have gotten if they’d just waited until 70.

Are the opportunity costs too high to justify waiting for a fatter passive income stream?

Indeed, perhaps it makes more sense to receive less money while one is younger and still able to pursue one’s passions (ones that cost money, at least) than to wait until a time when one might not be able to get as much enjoyment (or utility) out of the money (and the extra cash one would receive by opting in later). For those whose lifestyle (or that of loved ones) won’t be upgraded, it may make sense not to take the minimum amount at age 62.

However, for most, I’d encourage those who are on the fence about when to start opting into Social Security to do more than just crunch all the numbers with their financial adviser to determine what the magic number is. When it comes to weighing the opportunity costs, it all comes down to personal values and the wishes of loved ones.

The big questions to ask oneself

Does one want to have a little less money so that one can go on a dream vacation while the grandkids are still young? Or are there more worthy pursuits (think educational expenses) that can be tackled later on with the cash flows? Is there a better middle ground (let’s say opting in at 65) that would make for an optimal balance between opportunity costs and the costs of missing out on a solid risk-free rate of return?

As always, one won’t know the answer definitively until taking time to think about it. And that’s completely fine. The good news is that there’s no rush (unless you’re already 70) and there might be no right answer, either.

So, in short, the best way to manage the opportunity costs is to weigh one’s financial circumstances and budgetary constraints, but to also pay attention to one’s wishes for the present and aspirations for the future. Sometimes getting a dollar today means a lot more than getting two dollars in a few years down the road, when the road will be significantly shorter and potentially bumpier.

If You have $500,000 Saved, Retirement Could Be Closer Than You Think (sponsor)

Retirement can be daunting, but it doesn’t need to be.

Imagine having an expert in your corner to help you with your financial goals. Someone to help you determine if you’re ahead, behind, or right on track. With SmartAsset, that’s not just a dream—it’s reality. This free tool connects you with pre-screened financial advisors who work in your best interests. It’s quick, it’s easy, so take the leap today and start planning smarter!

Don’t waste another minute; get started right here and help your retirement dreams become a retirement reality. (sponsor)

The post Why Waiting to Claim Social Security Benefits Might Cost You More Than You Think appeared first on 24/7 Wall St..