The Best Time to Start Taking Social Security

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    • #177407

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      This article shares some insight on when the best time to take social security. Do you take it as soon as you reach social security age or do you wait till full social security age?

      I am still about 15-20 years before getting to social security age. I don’t have it on my planning for retirement fund, I am not expecting anything from it. If it is there when I reach social security age, then it is all gravy. Maybe others can share insight on this subject.


      People say you should hold off taking Social Security until full retirement age or later rather than starting benefits early. I disagree. I think I can do better by taking benefits as soon as I can and investing them, even if I earn only a modest rate of return. And if I invest more aggressively I believe I can come out even further ahead. What do you think? –Gordon

      Clearly there are instances when someone may be better off taking Social Security sooner rather than holding off until later for a larger benefit. For example, if your health is so poor that you’re virtually certain you won’t make it even into your 80s, then starting payments as early as possible could be the right way to go.

      Similarly, if you’ve effectively been forced into early retirement and have very little or no savings to tap for retirement living expenses, then you may have no choice other than to apply for Social Security as soon as you can, which is age 62.

      But such relatively extreme situations aside, it’s hard to make a compelling case for taking Social Security as soon as you’re eligible. And, frankly, I don’t think your rationale that you’ll do better by taking benefits as soon as possible and investing them rather than delaying for a higher Social Security payment down the road is very compelling.

      Let’s look at some numbers.

      For the sake of this example, let’s assume that your full retirement age is 66 (which is the case for anyone born between 1943 and 1954) and that you’ll receive a Social Security benefit of $24,000 a year in today’s dollars if you wait to take Social Security until you reach that age. (Yes, the benefit is paid monthly, but to keep things simple throughout this example, I’ll use annual figures and also leave taxes out of the equation.)

      If you start taking benefits at 62, however, your payment will be cut by 25%, which means you’ll collect $18,000 a year. Since Social Security benefits are adjusted for inflation, let’s also assume that your benefit increases by 2% a year for inflation.

      To follow your plan, you would invest the four years of early Social Security benefits you receive, socking away $18,000 at age 62, $18,360 at 63 ($18,000 plus 2%), $18,727 at 64 ($18,360 plus 2%) and $19,102 at 65 ($18,727 plus 2%).

      If we assume a return of, say, 6% a year (which I consider pretty generous given today’s low yields and the low returns many investment pros are expecting), you would end up with an investment stash of $85,881 at the end of four years, just as you’re turning 66.

      Now, you wouldn’t have that $85,881 had you waited until you reach 66 to take Social Security. But you would be eligible for a much bigger starting payment of $25,978 (the full retirement age benefit of $24,000 in today’s dollars, plus annual inflation adjustments of 2% for four years). That payment is $6,494 more than the $19,484 you’ll actually get at age 66 (your age 65 payment of $19,102 plus 2% inflation) because you started collecting benefits early. Each year, that gap between the payment you receive and the payment you could have had by waiting will grow in dollar terms. In this example, the payment you get will be smaller by $6,625 at 67, by $6,757 at by 68, $6,892 at 69 and so on.

      So the question is, how long will the investment stash you built with your early Social Security payments that are earning 6% a year last if you pull enough from it each year to make up the difference between the smaller payment you’re getting and the larger payment you would be receiving had you waited till 66 to collect?

      The answer in this scenario is 21 years, at which point you would be 83. That is essentially the breakeven point between starting at 62 and starting at 66. If you live to age 84, you would no longer have your investment stash and your Social Security payments for that year would total $27,828, or $9,276 less than the $37,104 you would receive had you waited until full retirement age to collect. Each additional year you live and are stuck with the smaller payment, you’ll fall further and further behind where you would have been had you delayed benefits.

      Of course, if you die before age 83, then you’ll come out ahead (or your heirs will) because you’ll still have some of that investment stash left. But what are chances you’ll die before hitting 83? You can’t know that for certain, but you can get an idea by going to the new Actuaries Longevity Illustrator tool created by the American Academy of Actuaries and the Society of Actuaries. According to the tool, a 62-year-old man of average health has a 50% probability of living 23 more years to age 85; a 25% chance of living 30 more years to 92; and, a 10% chance of living another 35 years to age 97. The probabilities are higher if you’re in above-average health and also higher for women than men.

      Based on those estimates, I’d say it’s pretty clear that, absent some concrete knowledge that your lifespan will be unnaturally short, you would be better off abandoning your plan and instead holding off for a higher Social Security benefit at full retirement age, or possibly even later.

      Ah, but what if you invest more aggressively, as you seem willing to do? Well, if you assume you’ll earn 8% a year, the breakeven point stretches out to age 91, which makes your strategy appear more attractive. But to have a shot at that return, you’d probably have to go with a high-octane portfolio of 100% stocks, or something close to it, which would leave you highly vulnerable to market setbacks. And even if you achieved that 8% annual return, you still may not come out ahead if you’re one of the a 25% expected to live to age 92 or the 10% projected to make it to 97.

      To my mind, embarking on a highly volatile investing strategy and counting on such a lofty return is unrealistic, especially for someone in retirement. Why take the risk when the alternative — a Social Security payment that goes up by roughly 7% to 8% for each year you delay between age 62 and 70 (after which you get no more increases for delaying) — is not only simpler but a sure thing?

      I’m not suggesting that you make your decision solely on the basis of this example. Clearly, you’ve got to take your particular circumstances — your health, the size of your nest egg, what other resources you have to fall back on, etc. — into account. If you’re married, there are even more issues and options to consider. For example, if your spouse will be counting on a survivor’s benefit after you die, going for that smaller early benefit could relegate your spouse to a lower payment for life after you’re gone.

      Although new rules that went into effect at the end of April will prevent married couples who aren’t already doing so from taking advantage of one Social Security claiming strategy that can increase joint benefits — file and suspend — there are still other ways spouses may be able to better coordinate how they file and maximize how much they receive.

      Given the important role Social Security plays in creating a retirement income plan, it pays to become as familiar as you can with how the system works and the options available to you. The Boston College Center For Retirement Research’s Social Security Claiming Guide can help on that score, as can going to Financial Engines’ free Social Security calculator, a tool that can suggest claiming strategies for singles and married couples.

      For a more comprehensive analysis of your options, you may want to check out one of the services that charge a fee, such as Maximize My Social Security or Social Security Solutions, or perhaps even consult a financial adviser.

      Ultimately, Social Security isn’t just another source of retirement income. It’s more like an insurance policy designed to help you maintain your standard of living in retirement and protect you against the risk of running out of money if you live a long, long time. I’d be wary of eroding the value of that protection for a strategy that’s likely to pay off only if you happen to die relatively early and/or your optimistic investing strategy comes off without a hitch.

    • #293782

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      That’s a good article, but it leaves out three important factors that I’ve considered, and as a result, opted to wait, possibly until the time I’m required to take it.

      1. Taxes–Right now we’re still bringing in enough income to put us in the top marginal bracket. Taking the benefit today would possibly result in a net check far less than down the line when our income drops off a bit, if we so elect, which we plan to do.

      2. 8% compounded, tax free. For every year you don’t take your benefit, your benefit amount increases by 8%, plus any COL increase, and that’s non-taxable. Try that in the stock market.

      3. Spousal Benefit–the stats show that it’s far more likely I’ll go before my wife, so the longer I wait, the bigger her spousal benefit when I croak.

      These reasons don’t make my decision right, because one never knows how long they will live. For now it’s the best course for us, as best we can determine. I figure if we don’t need the money and half of it would be given up in taxes, why take it now, given the benefits for waiting.

    • #293783

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      Very good points, LC. A couple of years ago, I was in the mindset to start taking SS as soon as I was of age to do so. You point #1 and #2 are the reason I have concluded that I will probably wait longer to take SS. I will retire before then, but wait till later before I start SS benefits. #3 is a very good consideration. Of course, I will have to wait till I retire to figure out the best course of action. You can plan and plan, but life has a funny way of blindsiding you.

      I like #2 point you have in the way that as you age, the more chance you may have medical issues and may need extra care. If you waited to start SS benefits, that 8% compounding will help alleviate those costs when you start benefits at a later age.

      Of course, everybody situation is different. You can only make the best decision for yourself as you see fit. I love this exchange of ideas on financial topics because you always learn something or it can confirm you decisions.

    • #293781

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      I know it is on the books as an entitlement, but I prefer to think of it as insurance. Thus my plan is to avoid taking it until I really need it. It is likely my wife will out-live me, so I’d rather leave it to her.

    • #293784

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      Here is another take on when you should take SS. This article says compare taking it out on a year by year basis. So, at 62 do not compare how much you would receive at 70, but compare how much you would receive at 63. Then ask yourself, “Do I want it now or wait another year”? You revisit this question every year since financial changes can occur quickly and you may need to start taking SS.

      If you compare 62 vs. 70, you may say, “I don’t want to wait till 70, I want it now”. That is probably what happens. That may be a mistake since financially you may not need it and would receive less benefit and pay higher taxes than if you waited a little longer as mentioned by LC earlier.


      Social Security is a Year-by-Year (or Month-by-Month) Decision

      For simplicity’s sake, writers and financial advisors often compare claiming Social Security at 62 to claiming at 70, in order to show the difference between the two extreme strategies. But in reality, the decision should be made step-by-step along the way. (“Do I want to wait a year? Do I want to wait another year?” And so on.)

      This is important because many people look at waiting until age 70, decide that 70 is too far in the future, and therefore default to claiming as early as possible at 62. That’s unfortunate because, even for people for whom claiming at 70 doesn’t make sense, claiming at 62 is still usually a mistake.

      For example, if you are an unmarried person, currently age 61 and trying to decide whether or not to claim Social Security ASAP at 62, you don’t want to compare claiming at 62 to claiming at 70. You want to compare claiming at 62 to claiming at 63. When we do that, we can calculate that the breakeven point is age 78. (That is, if you live to age 78, you are better off having claimed at 63 than having claimed at 62.) Using the 2011 actuarial tables from the SSA, we can calculate that for an average 62 year old male, there is a 67% probability of living to age 78. For a 62 year old female, there is a 76% probability. Conclusion: For most unmarried people, it makes sense to wait at least until 63, because there is a much greater than 50% probability of living to the breakeven point.

      Then, at age 63, we would want to see if it makes sense to wait until 64. The breakeven point between claiming at 63 and claiming at 64 is age 76. Using the same actuarial tables, we can calculate that for an average 63 year old male, there is a 74% probability of living to age 76. For a 62 year old female, there is an 82% probability. Conclusion: It probably makes sense to wait another year.

      And then you would repeat this analysis every year. (In theory, you should actually do the analysis every single month to see if it makes sense to wait one more month. But that would be a heck of a lot of work. In my opinion, it makes sense to reassess annually — or whenever you get new information about your life expectancy.)

      For somebody with a full retirement age of 66, the year-by-year breakeven ages would be as follows:

      Claiming Ages Breakeven Age
      62 vs. 63 78
      63 vs. 64 76
      64 vs. 65 78
      65 vs. 66 80
      66 vs. 67 79.5
      67 vs. 68 81.5
      68 vs. 69 83.5
      69 vs. 70 85.5

      And for somebody with a full retirement age of 67, the year-by-year breakeven ages would be as follows:

      Claiming Ages Breakeven Age
      62 vs. 63 77
      63 vs. 64 79
      64 vs. 65 77
      65 vs. 66 79
      66 vs. 67 81
      67 vs. 68 80.5
      68 vs. 69 82.5
      69 vs. 70 84.5

      To be clear, the above discussion is a simplification, meant to illustrate the general concept that the decision should be made year-by-year rather than simply asking “Should I claim at 70 or at 62?” A real-life analysis of your personal situation should ideally include a few other factors:

      Investment return earned on early-received benefits. In the above discussion, we’re assuming that early-received benefits earn a 0% real return (i.e., they precisely match inflation). Given that the yields on TIPS (i.e., the investment with a risk level most similar to that of Social Security) are currently at or near zero, that’s a pretty reasonable assumption. If real interest rates were higher, the breakeven points would be pushed back somewhat.

      Tax planning. The specifics vary from person to person, but in most cases tax planning is a point in favor of waiting to claim benefits, because of Social Security’s tax-advantaged nature.

      Spousal and survivor benefits for married couples. (As we’ve discussed before, for married couples, at least one spouse usually should be using one of the “extreme” strategies of filing at 62 or at 70.)

      Longevity risk. For anybody who is concerned about running out of money due to a very long retirement, delaying Social Security is often a good decision, even if there is a less than 50% probability that they will live to the breakeven point in question.”

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