Under normal circumstances, the earliest eligible age to apply for Social Security retirement benefits is 62. However, if you defer applying for it, your benefit amount will increase approximately 8% for every year you wait. To receive what is called the “normal” or “full” benefit, future applicants must wait until age 66 if born between 1943 and 1954. If you were born after 1954, the “normal” retirement age gradually increases to age 67 for those born after January 1, 1959.
You can also decide to defer taking your monthly retirement benefit well past the “normal” retirement age, but only until age 70. If you wait until age 70, your starting retirement benefit will have increased by 32% (4yrs. X 8%).
There are many factors that can affect the decision of when to apply for benefits. The most important ones for you and any spouse are: family employment status, personal financial considerations, and future health conditions affecting family longevity. Also, earned income from work while receiving social security payments before your “normal” retirement age will reduce social security payments by $1 for every $2 earned over $15720 (2015) and $1 for every $3 earned over $41,880 (2015) just during the first part of the same year one reaches “normal” retirement age.
But, the potential impact of other variables should be considered as well in making your decision. These include: future inflation rates, future investment returns, and marginal tax rates.
Sometimes one has no choice other than taking Social Security as early as possible because of financial necessity. But, if you do not need the income immediately, it may be more advantageous to apply for benefits at a later date. In order to make the best choice, “break even” calculations can be made to determine when it is better to start receiving benefits. When doing these calculations, certain assumptions concerning the variables mentioned in the previous paragraph will be made about future conditions.
Social Security benefits are designed to be actuarially equivalent for people who live an average lifespan. But, it is much more likely that you will live for either a shorter or longer period of time than that actuarially calculated average. Therefore, your actual lifespan, inflation during that time, and after-tax returns must be considered to determine the best time to apply for benefits.
General Observations about the Variables:
Inflation-
Social Security payments are adjusted annually to reflect inflation in the “cost-of-living” based on the annual change of the Consumer Price Index that is calculated each month by our government’s Bureau of Labor Statistics. Since 1975 benefits have increased every year except 2010 and 2011.
-The higher the rate of inflation experienced while receiving payments, the sooner one will surpass the initial advantage of receiving earlier benefits.-
Investment Return-
-The higher the investment return that can be earned on payments, the later one will surpass the initial advantage of receiving earlier benefits.-
Income Taxes-
-Taxes reduce the overall rate of return on investments. The higher it is, the sooner one will surpass the initial advantage of receiving earlier benefits.-
The calculation is also affected by one's sex. The average mortality ages for males and females at age 62 are approximately 83 for males and 86 for females. To receive more in cumulative benefits by those times, the rate of return on investment savings should exceed the rate of inflation by 4 to 6 percent for families with lower 10% to 15% tax rates on income. At higher tax rates, the investment return also needs to rise. Families in medium tax brackets 25% to 28%, the rate of return may need exceed the rate of inflation by 6 to 8 percent. For families in high tax brackets 33% to 35%, the rate of return may need to be 7 to 10 percent above the rate of inflation. Overall, the interaction of these variables creates the potential for “break-even” calculations to vary by as much as 5.5 years.
Other Considerations:
If you are in good health you may be more likely to live significantly longer than the government’s table for average life expectancy suggests. If you live well into your 80s, it may become more desirable to first draw income from current savings and defer applying for social security benefits until age 70. If you do this, your starting social security benefit will have grown by 8 percent per year creating a larger secured “deferred annuity income” for the rest of your family’s life. Taking benefits later also reduces the risk of running out of needed income in more distant future years.
If you are married and your retirement benefit is larger than your spouse’s, your spouse can receive your higher benefit amount for the rest of his/her life starting at the time of the earlier spouse’s death. If you have enough income or savings, so that you do not need or desire to apply for social security before age 70, it not only provides a higher guaranteed income to you, but also to the surviving spouse.
When you have more than one benefit or multiple beneficiaries that are entitled to benefits based on your benefit, the choice of when to apply for benefits becomes more complicated. Family structures today have become more complex due to high divorce rates, second families, and children born outside of marriage. All of these considerations can change the financial advantages of when to apply for benefits.
For married couples, since one or both partners are permitted to apply for a “spouse’s benefit”, it is necessary to consider the relative ages, work history, and earned benefit amounts of the partners to determine when and how it is best to apply.
As you can see, the decision on when to apply for benefits can become quite difficult for many. Determining when to apply for Social Security requires a careful analysis of the various factors that are relevant to your own family situation. Having the assistance of a financial advisor, who has expertise in this area, should be considered to help you analyze and be aware of all your options to help you make the best possible decision.
Greg Tinaglia
(last updated 09.19.2015)