There’s been a lot of discussion about the virtues of delaying Social Security benefits, all the way to age 70 if necessary. And while it’s true that your income will be higher as a result of the delay, it’s not always the right thing to do. We’re going to take a look at the tangible benefits of delaying Social Security until age 70, and a deeper look at why that’s not always the best strategy.
The Conventional Argument in Favor of Delaying Social Security Benefits
The earliest age at which you can collect benefits is 62, but assuming that your FRA is 67, that will mean a 30% reduction in benefits had you waited until age 67. What’s more, if you delay taking benefits until age 70, you can increase the monthly benefit by as much as 24% (8% per year for those born after 1943) above your FRA benefit. (There is no benefit for delaying benefits past age 70.)
So let’s consider an example to demonstrate the point. Let’s say that your FRA is 67, at which time you will be eligible to collect a monthly benefit of $2,000.
- If you take benefits at 62, they will be reduced by 30%, which will cut your benefit to $1,400 per month
- If you delay your benefits to age 70, they will be increased by 24% (over the benefit at your FRA), at which time you will be eligible to collect a monthly benefit of $2,480.
Taking the long view, your benefit will increase from $1,400 per month at age 62 to $2,480 if you delay collecting benefits until age 70. That’s in increase of $1,080 per month. Put another way, your benefit at age 62 will be only about 56.5% of what it will be at age 70.
This is the reason why delaying Social Security benefits is so strongly advocated in the financial media. I myself have recommended delaying as a core strategy for dealing with inadequate retirement savings.
Delaying the receipt of benefits – particularly to age 70 – has obvious benefits if you can afford the delay.
But is that always the right course of action, or are there times when taking benefits early makes sense? Let’s go against conventional thinking, and dare to consider the other side of the argument.
What are some compelling reasons why delaying Social Security benefits might not be the best strategy?
Your Expected Longevity and the Opportunity Cost of Delayed Benefits
No decision as to when to collect Social Security benefits can be made without some sort of reasonable analysis of a person’s health and predictable longevity. That means you have to consider any conditions you have that might shorten your life, or longevity in your family history. For example, if few people in your lineage make it past age 75, you’ll likely want to begin collecting benefits early. If people in your family commonly live into their nineties, you’ll probably want to delay until 70.
A crystal ball would really come in handy at this point, but since there are none known to exist, we have to crunch some numbers to see how this works.
According to statistics compiled by the Social Security Administration a man reaching the age of 65 today can expect to live, on average, until age 84.3. A woman turning 65 today can expect to live, on average, until age 86.6. That means that a 65 year old man today can expect to live roughly another 19 years, while a woman can expect to live for almost 22 years.
What does this mean for you?
If your benefit at age 62 would be $1,400, that means that you will sacrifice $134,400 in cumulative benefits ($1,400 per month X 12 months X 8 years) by delaying until age 70. A straight line calculation alone shows that it would take more than 10 years of the higher benefit to recover the $134,400 in benefits that you gave up in the delay:
- $2,480 (benefit from delay to age 70) minus $1,400 (benefit at 62), equals $1,080 per month – that’s the benefit “premium“ you get for the delay;
- $134,400 divided by $1,080 per month equals 124.4 months, or ten years and 4.4 months.
So just by using a simple straight line analysis, if you delay collecting benefits until age 70, you will not begin to come out ahead on the delay until you’re past age 80.
But gets even more complicated…
Michael Kitces of Nerd’s Eye View has done a series of complicated calculations that also takes into account the effects of inflation and the return on investment that the early benefits could provide. He arrived at a “break even point” on the cost of delaying Social Security benefits from age 62 to age 70, and placed it at 22 years, or age 84.
Whether the actual breakeven point occurs at 80 or 84, it’s important to know that it exists and that it’s a real cost. If you believe that you are unlikely to live much past your early 80s, taking benefits at 62 or shortly after will likely be the better strategy. If you think that you are highly likely to live well beyond your early eighties, you’ll probably be better off delaying benefits until age 70.
You Are Unemployed or Underemployed
No matter how much you read or hear about the advantages of delaying taking Social Security benefits, if you are unemployed or underemployed in your early 60s, collecting benefits as soon as possible will most likely be the best strategy.
Since the economy began to melt down in 2007 a lot of people saw their careers either eliminated or seriously downgraded. Probably no group was hit harder than people over the age 50. Not only were people in that age group the first to be let go – often from very long tenures – but many found re-employment close to impossible. Some took lower paying full-time jobs, some took part-time jobs, and others started marginal businesses, including contracting work where available.
Few of those arrangements pay living wages, or even offer employee benefits. If this has been your situation for the last several years, Social Security must be viewed as an additional income source, and one to be tapped as soon as possible. There is no point in delaying benefits until age 70, when you are financially drowning at age 62.
Bonus: You can earn up to $15,720 in 2015 before your Social Security benefits are subject to a rate of reduction of $1 for every $2 that you earn. This means that you can earn $1,310 per month, plus your Social Security benefit. And unearned income (interest, dividends, capital gains, and rents) won’t have an effect on your benefit.
Conversely, if you can earn substantially more than $15,720, you will probably be better off continuing to work, and delaying collecting Social Security, until and unless your income falls below the threshold.
To Avoid Tapping Your Retirement Savings For as Long as Possible
Collecting Social Security benefits early can be a solid strategy that will help you to avoid drawing down your retirement savings. Even if you’re in a low income situation, where you are contributing very little to your retirement plan, initiating benefits at age 62 can allow your investment portfolio to continue growing for another eight years. In that way you are exchanging a higher Social Security benefit later, for a larger retirement investment portfolio later.
For example, let’s say that you have a retirement investment portfolio of $200,000. With a fairly modest annual investment return of 5%, your nest egg can grow to nearly $300,000 in eight years. By initiating collecting Social Security benefits at age 62, you may give your portfolio the time that it needs to continue growing.
By contrast, if you start drawing from your portfolio at age 62, let’s say at the safe withdrawal rate of 4% per year, your portfolio would be worth only slightly more at age 70 than it is right now.
A Better Reason to Delay Benefits – At Least Until Your FRA
In truth, the decision to begin collecting benefits at age 62 or 70 isn’t an either/or arrangement. Probably the better strategy would be to delay collecting benefits until you reach your FRA. This will enable you to retire several years before turning 70, but at the same time it would make your monthly benefit higher than it would be if you begin to collect at 62.
But here’s the better reason: If you delay collecting benefits until you’re FRA, there is no income threshold beyond which Social Security will begin reducing your benefits. That is to say that you can earn as much money as you want, and collect your full Social Security benefit check each month. That’s an arrangement well worth delaying for.
The Final Analysis
I fully get what everyone else is saying when they recommend delaying Social Security benefits until age 70 – I’ve often recommended it myself. But in the final analysis, there is one factor that none of us can ignore: life isn’t perfect!
I like to say that we’re all imperfect people, living imperfect lives, in an imperfect world. That means that even after you finish all the number crunching, and consider all of the best advice, sometimes the best you can do is a happy medium. Yes, in a perfect world, where we know that we’ll all live into our 90s, it would make abundant sense to delay collecting benefits until age 70.
But we don’t live in a perfect world, and life doesn’t always cooperate with our best laid plans. Even after crunching the numbers and reading and listening to all the advice, carefully consider your situation and what will be the best strategy for you. There’s no one-size-fits-all here – it comes down purely to personal circumstances.
What’s your plan for collecting Social Security? 62, FRA, 70?