Will My Heirs Benefit If I Take Social Security Early?

Happy senior
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Today’s question comes from Darren:

“Most extol the benefits of waiting until full retirement age to draw (Social Security benefits), as the monthly benefit is higher.

However, if you have a nest egg, isn’t it best to draw ‘your money’ from Social Security early, even if it is lower, because then you don’t have to take from your nest egg that you can give to your beneficiaries?

Why not take it as soon as possible and save the money for the kids?”

Life expectancy matters

Darren: Like so many things related to when to take Social Security, the answer to your question depends on life expectancy. As you point out, if someone does not take benefits before full retirement age, they potentially lose out on having those benefits and there will be less money to give to their heirs.

But this is true only if the higher benefits that they will receive from claiming later don’t compensate for these losses. The amount of money you will be able to leave in your will depends on the size of your assets at the time of your death. If you claim later and you live a long time, you might be able to leave more — not less — to your heirs.

One way to envision this problem is to think about the ‘break-even point.” The break-even point is the age at which the lost benefits for delayed claiming are fully compensated for by the higher benefits received by waiting to claim.

Let’s work through an example. Suppose that your full retirement age is 66 and your full retirement benefit is $1,000, and you are trying to decide between claiming at 62 and 66:

  • If you claim at 62, your benefit will be reduced by 25% — so you will receive $750 monthly.
  • If you wait until 66, your benefit will be $1,000 monthly — an extra $250. But by waiting those extra four years to claim, you will have “lost out” on $36,000 ($750 multiplied by 48 months) in the four years between ages 62 and 66.

How long will it take to get the $36,000 back? At an extra $250 per month, it will take 144 months ($36,000 divided by $250 per month), or 12 years, to recover the money lost by delayed claiming.

At that time, you will be 78 years old. That may seem like a long time to wait, but once you reach 78, you will be getting more money than you lost from delayed claiming. (Note: I have simplified the story, because you will receive interest on the money you do not spend by claiming it early, and Social Security benefits are inflation-adjusted. These two factors work in opposite directions and more or less offset each other, so the overall calculation varies somewhat from this simpler description.)

So, much depends on how long you expect to live. For someone who is 62, life expectancy is 82 for men and 86 for women. There is a strong possibility that if you are in good health now, you will get more than your money back by delayed claiming, and you will have more money at your death to will to your heirs.

If you are in poor health or there are other reasons why you expect you might not live as long as the average person, then early claiming could be the more reasonable option.

Lastly, there is growing concern these days that more people are living a very long time and very few people are buying annuities that provide them with lifetime income. Social Security is an annuity, and delayed claiming is by far the cheapest annuity you can buy.

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About me

I hold a doctorate in economics from the University of Pennsylvania and taught economics at the University of Delaware for many years. Presently I am teaching at Gallaudet University.

In 2009, I co-founded SocialSecurityChoices.com, an internet company that provides advice on Social Security claiming decisions. You can learn more about that by clicking here.

Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.

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