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.