Is It Better to Take Social Security Early?
I’ve written numerous articles over the years about strategies for maximizing your Social Security (SS) benefits. But the most fundamental decision all retirees face is when to start taking payments. If you need the money, you may have no choice but to start taking payments as soon as you can. But if that’s not the case, which is better: to start as early as possible and invest the proceeds, or to wait and take advantage of higher payments?
First, it’s important to understand how SS payments work. Your Full Retirement Age (FRA), which is based on your date of birth, is the age at which you can begin collecting what the Social Security Administration (SSA) calls your Primary Insurance Amount (PIA). This is the monthly amount that the SSA will send you for the rest of your life. The calculation of your PIA is a bit complicated, but suffice it to say that it is based on your highest 35 years of earned income, adjusted for inflation.
To add to the complexity, the SSA gives you some flexibility. You can choose to begin collecting your SS benefits at your FRA, as early as age 62 (even earlier in certain circumstances), or as late as age 70. If you choose to start early you will get reduced benefits for the rest of your life, but if you choose to start later you will get expanded benefits (called delayed credits). For every year you delay between age 62 and FRA, your initial monthly payment increases by 8%. The same is true for every year you delay between your FRA and age 70. For example, if you begin collecting benefits at age 62 and your FRA is age 66, your starting payment will be only 75% of your PIA. If you instead wait to begin at age 70 – the longest you can wait and still get the 8% annual delayed credits – your initial payment will be 32% higher than your PIA. As you might surmise, the age at which you start can have a pretty big impact on the total income you receive over your retirement lifetime.
It’s also important to consider two other facts about SS benefits: (1) if you start taking SS benefits before your FRA and you are currently working, your benefits will be reduced, and (2) regardless of your starting age, your payments include cost-of-living adjustments that enable you to keep pace with inflation.
If you’re the analytical type, you might approach this question by doing a breakeven analysis. That is, you calculate the age at which you end up with the same cumulative income regardless of whether you start collecting benefits at age 62 or at age 70. If you treat this as a simple mathematical exercise, the answer is around age 82. That is, if you plan to die before age 82, you’ll be maximizing your SS benefits by starting as early as possible (i.e. at age 62), but if you plan to live longer, you should wait until age 70 to start.
However, such an analysis would be quite incomplete. Assuming you don’t actually need the money but plan to invest it, realistically there are a couple of other factors you need to take into account:
- The return on investment (ROI) of your SS income
- The inflation rate, which impacts the growth over time of the SS payments
- Your tax rate, which affects not only how much you get to keep but also how much of your SS income is taxable
Doug Lemons, a retired SSA deputy assistant regional commissioner, recently performed the above analysis with various ROI, inflation rate, and tax rate assumptions. He reached a very interesting conclusion: the ROI on the invested income must generally exceed the rate of inflation by 5 percent or more to justify taking benefits at age 62 rather than at FRA, and by 3 percent or more to begin at FRA rather than waiting until age 70. In today’s low inflation, low interest rate environment, getting a consistent real return (return in excess of inflation) of 4 or 5 percent or more annually is extremely challenging. What’s more, Lemons found that when inflation rates and/or marginal tax rates are high, the rate of return needs to be as high as 7 or 8 percent above inflation to justify collecting early benefits. And both those findings were for men. For women – whose life expectancies are longer – the rate of return needs to be even higher. In other words, in most situations you would be hard pressed to start early SS and get a high enough real rate of return on your investments to come out ahead. Therefore, based on a breakeven analysis, it’s probably better to delay starting benefits as long as possible under almost any circumstances. Here’s a link to the article: http://www.fpanet.org/journal/CurrentIssue/TableofContents/WhentoStartCollectingSocialSecurityBenefits/
But a breakeven analysis is not the only way to think about Social Security. Consider that SS is the only annuity you can get that is (1) guaranteed by the federal government and (2) adjusts for inflation. The latter feature is extremely valuable because inflation is the biggest threat to avoiding outliving your money in retirement. So as a complement to a well-diversified retirement portfolio, SS can significantly improve your chances of having enough money to last you for the rest of your life, however long that turns out to be. With that in mind, it would make more sense to follow a strategy that maximizes your monthly payments on the assumption that you might have a very long life. In short, it’s again better to delay starting SS until age 70 taking this perspective. Skeptics might argue that the government is poised to start taking away some of these features, and that’s certainly a possibility. But unless you currently have some kind of terminal illness, do you really want to bet that you’re going to die sooner rather than later? What will happen if you turn out to have been wrong?
So far we’ve been considering Social Security for a single individual. The decision gets more complex for a married couple. When one spouse dies, the surviving spouse gets to start taking the deceased spouse’s SS payments if they’re higher than his or her own. This is especially valuable for couples where only one spouse worked. If you’re the primary breadwinner in your family, and had chosen to start your benefits early, your reduced payments would carry over to your spouse if he or she outlives you. Do you really want to limit your spouse’s SS income after you’re gone? Especially if he or she ends up living for many years after you’ve passed away?
As I’ve written previously, if you are married, widowed, or divorced there are many strategies you can follow to further maximize your social security benefits (see https://www.cognizantwealth.com/2013/04/17/how-to-legally-maximize-your-social-security-benefits/). But as to what age to start collecting benefits, I believe it’s almost always better to delay as long as possible, unless you have a terminal illness or you absolutely need the money sooner.
I will be 62 in March, retired and in good health. My husband is seven years younger than me, is the primary breadwinner and plans to continue to work until age 65, possibly longer. We are considering my taking my Social Security early and applying all of that money toward our mortgage, and he would wait until full retirement age to draw his Social Security. Is that a good idea?
This is an excellent question. If your husband is the sole breadwinner then in general, for all the reasons described in the blog, you’d be better off waiting until your FRA to start your spousal benefit, and your husband would do better to wait until age 70 to start his own benefit. The size of your mortgage, its interest rate & term, and how it impacts the other goals you have for the rest of your lives would all be factors in determining whether or not taking SS at age 62 would be the better approach. If you are additionally entitled to a smaller SS payout on your own from having worked for at least 40 quarters in the past, then one alternative strategy for increasing your combined SS income (given the spread in your ages) might be for you to start your own benefits at age 62, then switch to your spousal benefits at your FRA. If you had been previously divorced or widowed, there would be even more strategies from which you could choose. Unfortunately, I do not know enough about your particular situation to be able to provide more than the general suggestions above.
I talked my husband into collecting his SS benefits at 62. That was almost 4 years ago and since then he has been able to cut back his work hours and it has been a blessing to us. Why – he has had type one diabetes for 48 years and has had over 15 surgeries (12 on his eyes). He refused to go on disability even though 3 of his 6 doctors asked him to think about it when he went blind in one eye. He has been able to pay the bills and enjoy working 2 or 3 days a week. When he turns 66 in a couple of months he will have his benefits readjusted to a higher amount. Win win for some people. Weighed the options and early benefits were the best for him.
This is a pretty thorough analysis. The one area that I often don’t see addressed in this tradeoff is that of mortality risk. The mortality tables used predict that the average 62 year old has another 20 years to live. That means that there is a 50% probability that that person will still be alive to collect his social security payment when he/she turns 82. Note that this is different than most financial planning analyses in that it’s not a matter of not having *any* social security benefit if you live longer, it’s a matter of optiimization. So then it seems fair that the probability of living until you’re 82 should be multiplied by the benefit shouldn’t it? That’s the standard way of measuring risk/reward for probabilistic payoffs (like a lotto ticket for example).
How do we evaluate the tradeoff between early or delayed start of Social Security benefits and drawing down other retirement assets to meet expenses? My wife and I are both 64, retired and could live only from our 401(k) or start SS and use less. Our SS benefits now would cover about 1/3 of our living expenses. Would it be better to start the SS benefits and not take so much from our 401(K), or delay SS until we’re 70 and draw more 401(k) now?
I have run several Web site calculations and understand the choices strictly in terms of increasing our total SS benefit by delaying, but does it make sense to burn up more of the 401(k) now for a significantly larger SS benefit in several years? What’s the calculation?
This is a good question if you need the money prior to turning 70. This tradeoff decision depends on a number of factors: your future needs and goals (cost and timing), your tax situation, and whether or not you have access to other sources of income or savings. There’s also the question of trading off guaranteed income for life vs. income that is subject to economic and market risk. Unfortunately it’s too complex to reduce to a simple formula. A good retirement plan is really what’s needed to help you answer this question.
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