When Should You Start Taking Social Security?
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. Which is better: to start as early as possible or to delay benefits as long as you can?
First, you need to understand how SS payments work. Your Full Retirement Age (FRA), 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 pay 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.
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 your benefits will be reduced for the rest of your life, but if you choose to start later, your initial monthly payment increases by 8% for every year you delay. 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 instead you wait to begin at age 70 your initial payment will be 32% higher than your PIA.
It’s also important to take into account several additional facts about SS benefits: (1) if you start collecting SS payments before your FRA and you are currently working, your benefits will be reduced, and (2) regardless of your starting age, benefits include annual cost-of-living adjustments to keep pace with inflation.
There seems to be three primary camps when it comes to the “when to start” decision. The first does not trust the federal government’s commitment to continue to fund SS and/or to keep payments in line with inflation. Their decision is always to start as soon as possible and collect as much as they can before benefits are taken away or the SS trust fund goes bankrupt. My view is that – given the current size of the voting block comprised of seniors – it would be suicidal for any politician to allow SS to fail or even to cut benefits without first looking at additional sources of income such as raising the income limit for FICA taxes that contribute to SS.
The second group views the decision as an analytical maximization exercise (i.e. which choice will generate the greatest lifetime income). Most try to determine the breakeven age beyond which the lifetime payment by delaying benefits until age 70 exceeds the lifetime amount by starting benefits earlier. The simple calculation puts the breakeven age at about 83 when starting at age 70 as compared to starting at FRA. That is, if you expect to die younger than 83, starting at FRA is better. The breakeven age is even lower when compared to starting at age 62. More sophisticated engineering-types additionally attempt to take into account the return on investment (ROI) of the SS payments (assuming they don’t need to use the money) as well as other factors such as inflation rates and tax rates. The most authoritative modeling I’ve seen was by Doug Lemons, a retired SSA deputy assistant regional commissioner. Eight years ago he performed the above analysis with various ROI, inflation rate, and tax rate assumptions. He concluded that the ROI on the invested income would have to exceed the rate of inflation by 5% or more to justify taking benefits at age 62 rather than at FRA, and by 3% or more to begin at FRA rather than waiting until age 70. And that’s when inflation and tax rates are low. When they’re high the ROI spread above inflation rose to over 6% to justify collecting early benefits.
It’s definitely worth a conversation with your CFP® before making this very important decision. Especially if you’re a married couple which makes it even more complex. Oh, and I forgot to mention the third group. Rather than betting on how soon they expect to die, they recognize SS for what it is: a government annuity to provide some support for retirees no matter how long they live. The decision for them is simple: wait until age 70 to maximize the monthly payments just in case they happen to live a very long life.