One of the most important decisions a federal retiree must make is when to draw Social Security. The internet is flooded with opinions on this topic and many new blogs and videos released claim to have figured out the perfect age; however, this one-size-fits-all approach to the Social Security question inherently ignores the uniqueness of each individual case. The age that makes the most sense for one individual may not be wise for another person based on a number of factors. Although the Social Security question is not as easy to answer as some proclaim, there are certain factors around which the decision can be framed. Understanding Social Security in light of four key factors can go a long way in helping an individual decide what age to begin drawing Social Security for FERS Retirees.
The Cash-flow Decision
The cash-flow decision revolves around the question, “Do I have enough money to meet monthly needs?” If the answer to this question is no, then perhaps the decision of when to draw Social Security is already resolved. If an individual cannot pay for a mortgage or rent, or doesn’t have enough money left over to purchase food or other necessities, then waiting may not be an option.
FERS retirees often ponder, “Will I have enough money to meet monthly needs at age sixty-two?” FERS retirees have the benefit of being able to retire at Minimum Retirement Age with 30 years of service or at age 60 with 20 years of service. In either of these situations, a FERS retiree would draw a FERS pension but also typically receive the Special Retirement Supplement (SRS). As a bridge until Social Security, the Special Retirement Supplement ends at age 62, whether the retiree decides to draw Social Security at that age or not. So, how does this impact the decision of when to draw Social Security? Since the SRS ends at age 62, a federal retiree may see a potentially significant drop in monthly income. Although a federal retiree may have enough to meet monthly needs at age 59 with the SRS, will there be enough money each month once the SRS ends at the age of 62?
The Break-even Analysis
Social Security may begin as early as age 62, but can be delayed until age 70. For every year an individual delays drawing, the benefit increases by roughly 8% (until age seventy). A break-even analysis simply finds the point at which the total amount drawn for different ages is equal. For instance, let’s assume Kathy begins drawing $1,200 monthly at age 62. If Kathy waits until her full retirement age of 67 to draw, her monthly benefit would be about $1,763. Her break-even point, which is the point at which the total amount drawn is the same, would be at age 76, regardless if she begins receiving benefits at age 62 or 67. After the break-even point, the total amount drawn from Social Security would be greater by waiting to draw at 67 rather than beginning at age 62.
So, what does all this mean? Basically, the break-even analysis is useful when considering life expectancy. In the example above, if Kathy is planning on or thinks she will (based on health and family history) live well past her break-even age of 76, then waiting to draw until her full retirement age will allow her to draw more from Social Security over the course of her lifetime.
The cash-flow decision and break-even analysis are important but are not the whole story when it comes to Social Security. Next month, we will review two more important factors to consider.