Many sources, including latest article in LA Times and several articles on well-known websites like ssa.gov and schwab.com state that many retirees lose out on valuable benefits because they collect too early. BUT IS IT REALLY TRUE? The most common mistake people make in regards of collecting Social Security Benefits is that they file before carefully considering all their options and crunching the numbers.
So, when is the best time to apply for SS benefits?
Answer to this complex question requires careful consideration of several factors in each specific case.
Most people are eligible to start collecting Social Security benefits at age 62. But if you wait until what the Social Security Administration calls your full retirement age (FRA), which varies based on your year of birth, you’ll get a larger monthly benefit, known as your primary insurance amount (PIA). If you don’t start collecting your Social Security benefits on the date of your FRA, your benefits will continue to increase until you reach age 70.
The known facts are:
- If you delay benefits until age 70, your monthly benefit increases about 8% per year
- Your monthly benefit at 70 could be up to 76% larger than what you would get at 62
So technically, you can get a smaller payment for a longer amount of time or a larger payment for a shorter amount of time. So, what is better for you? In theory, based on average data for millions of people, with today’s constantly increasing life expectancy, you will most likely collect more Social Security benefits if you wait until you turn 70. But when you consider one person or one couple, the averages might not apply. Once you understand how the system works, you can make the best decision for your own situation.
What factors should you consider?
A comprehensive 2012 study by NATIONAL BUREAU OF ECONOMIC RESEARCH identifies the factors that make delaying Social Security benefits favorable, concluding that the gains from delaying are greatest:
- When interest rates are low
- For married couples relative to singles
- For single women relative to single men
- For two-earner couples relative to one-earner couples
- For a married couple, deferring the primary earner’s benefit as compared to deferring the secondary earner’s benefit.
Think About Your Life Expectancy
According to the Social Security Administration, the typical 65-year-old today will live to age 83, one in four will live to age 90, and one in ten will live to 95. Women have a slightly higher life expectancy than men, and the odds are even better that one person in a married couple will outlive the averages.
For example, for an average person born between 1943 and 1954, delaying the start date from age 62 to age 66 increases monthly benefit by 33%. Delaying start date to age 70 will result in monthly benefit increase of 76%.
You can compare total collected benefit for yourself as shown in the example below. A break-even analysis will show you how long you have to live to receive higher total collected benefit. Let’s say that you’re entitled to a $1,000 monthly benefit at age 66, and if you start collecting benefits at age 62, your monthly benefit is $750. If you hold off until age 70, your monthly benefit will increase to $1,320.
|Begin Age 62 Monthly Benefit $750||Begin Age 66 Monthly Benefit $1,000||Begin Age 70 Monthly Benefit $1,320|
|Live to age 70||$72,000||$48,000||0|
|Live to age 75||$117,000||$108,000||$79,200|
|Live to 78||$144,000||$144,000||$126,720|
|Live to age 80||$162,000||$168,000||$158,400|
|Live to 83||$189,000||$204,000||$205,920|
|Live to age 85||$207,000||$228,000||$237,600|
|Live to age 90||$252,000||$288,000||$316,800|
|Live to age 95||$297,000||$348,000||$396,100|
So, based on the example shown above, you would have to live beyond 78 to really benefit from retiring at full retirement age of 66 and live beyond age of 83 to really benefit from delaying collecting social security benefits until the age of 70. Of course you can’t predict how long you will live. But if you’re healthy and longevity runs in your family it is more likely you will collect higher lifetime benefit by postponing your start date.
Consider Current Interest Rates
Every year that you delay collecting Social Security between the ages of 62 and 70, your monthly benefit will increase between about 6 and 8 percent.
Now, let’s say you have other savings or plan to invest 100% of your social security benefits; will you be able to receive similar rates on your risk-free investment? Clearly, the lower the prevailing interest rates, the more you stand to benefit over the long run by delaying Social Security, especially if you take taxes and inflation rates into consideration. Also note that unlike with your investments, there is no compound interest on delayed Social Security benefits. Shoven and Slavov study concludes that delaying Social Security is most advantageous when real interest rates are 3.5% or lower.
Other Sources of Income
If you have savings or income from other sources, and can afford to postpone your start date, you will likely benefit by delaying. If you file for Social Security benefits before your FRA and continue to work, part of your benefit might be withheld. As of 2016, if you are under full retirement age for the entire year, $1 is withheld for every $2 you earn above the annual limit of $15,720; and for the year when you reach FRA, $1 is withheld for every $3 you earn above $41,880 during the period before you reach FRA. No benefit is withheld if you continue working after your full retirement age.
There is another important fact, if you continue working past your planned retirement age, and your earnings are higher than during the previous years, your social security benefit will be recalculated to increase your benefit.
If You’re Married
There are ways to boost a combined benefit over both of your lifetimes as well as survivor benefits. This involves analyzing difference in age, amount of personal benefits vs. potential spousal benefits.
If your spouse already filed for Social Security benefits, you should compare potential annual earnings starting the age 62, if you choose to receive a benefit based on your own earnings or a spousal benefit, which is up to 50% of your spouse’s earnings, The actual percentage of spousal benefit depends on the age when it’s filed. If you wait until FRA or later, you collect 50% of what your spouse currently receives. But if spousal benefit is taken at age 62, the benefit is reduced to 35%.
The impact on survivor benefits is similar. At FRA a widow or widower can collect up to 100% of their spouse’s benefit (or a reduced benefit starting at age 60). When someone opts to collect benefits early, his or her surviving spouse will also collect a reduced benefit. Conversely, when a person decides to delay benefits, he or she is providing their survivor with a larger benefit.
If you are divorced but were married for at least ten years and are currently unmarried, you can still collect a benefit based on your ex’s record.
There are several typical strategies for planning delayed Social Security benefits for a married couple; the only way to determine which strategy is works better is by crunching the numbers.
Consider Your Taxes
Regardless of when you retire, up to 50–85 percent of your Social Security income may be taxable if your modified adjusted gross income (MAGI) reaches certain levels. This is very important to consider when planning how to use distributions of your investments during retirement. Be aware that slightly higher Social Security benefit may bump you up to a higher income tax bracket.
Consider taking benefits early if you are:
- In poor health
- You are not working
- You can’t make ends meet
- You are the lower earning spouse and your spouse can wait to file for a higher benefit
Consider delaying the benefits if you are:
- In a good health and longevity runs in your family
- You are working and making enough money
- If you have other sources of income and collecting SS benefits will significantly increase the amount of taxes you pay
- You are the higher earning spouse and want to make sure that your surviving spouse will receive a higher benefit