This article addresses the financial aspects of this question. There are other non-financial considerations that do need to be considered in making the decision to delay your Social Security benefits. An example would be claiming earlier to have additional monies so that you can travel or pursue other interests at a younger age when you are more physically able to enjoy it. Another example, might be when more emphasis is placed on wanting to make sure your spouse will receive the largest benefit at your death during the remainder of her life, since a spouse can claim the deceased spouse’s benefit if it is larger than their own.
Social Security can be claimed at any time between ages 62 and 70. The monthly benefit paid will be higher the longer you wait to start receiving Social Security payments. Since payments will be made for your entire lifetime, it may be beneficial to claim later if you think your likely to have a longer than average life expectancy.
The reason for this is the Social Security Administration’s use of actuarial (mortality) statistics in the formula used to determine the size of monthly benefit payments. The benefits paid are designed to be equivalent so that you will be paid the same total lifetime benefit regardless of when you initially apply.
Filing earlier will reduce the amount of your monthly benefit but at the same time increase the number of monthly payments you will receive over your lifetime which will make up the difference. Therefore, if you do not think you will live an average life expectancy, it will generally be better to file as soon as possible at age 62.
[For every month that benefits are claimed before one’s full retirement age (between age 66 and 67 depending on your year-of-birth) benefits are reduced by 5/9 of 1% per month for the first 36 months prior to one’s full retirement age and an additional 5/12 of 1% for each month before that. If you retire after your full retirement age, benefits are increased by 2/3 of 1% for each month you delay until age 70.]
Another factor to consider is that your benefit is based on your earnings during your highest 35 years of earnings. If your latter year earnings are significantly higher than earlier year earnings, your benefit will be increased by their inclusion to replace any earlier year earnings that are lower.
The Simplified Calculation to Determine Time to Breakeven
Most articles on this subject focus on a simplified calculation of the amount of time it will take to recoup the amount of money you would have received had you started benefits earlier. Many espouse taking benefits at age 62, citing the fact that it will take many years to make up for the missed benefit payments before the higher future benefit payments will equal what you will have already received.
The years it will take to make up for the differences will depend on your specific benefits and the number of years you defer claiming benefits. A simple calculation is performed to determine how many years it will take for the deferred higher benefit payments to equal the earlier lower payments that will be received.
A typical calculated range of years it takes to breakeven when deferring past age 62 will look like this:
@63----14.0 yrs. @64----14.0 yrs. @65----12.6 yrs. @66----12.0 yrs. @67----11.7 yrs.
@68----11.1 yrs. @69----10.7 yrs. @70----10.3 yrs.
[The calculation requires figuring out how much total money you will receive over future years if you claim early divided by the higher monthly benefit payment you will receive by delaying the start of benefit payments.]
The More Comprehensive Calculation
A more comprehensive calculation also will consider the retirement investments and portfolio returns that are expected during your retirement years. This should be included to incorporate “the time value of money” into the analysis.
The best time to claim will depend on the overall investment strategy that will be implemented during that time. If you develop investment portfolios that will have significant participation in equity (stock) investments, the expected returns can make it more desirable to claim Social Security benefits earlier.
Some Illustrative Examples:
How long very conservative cash-equivalent investors that have little no exposure to equity (stock) investments will benefit by claiming:
(1) Social Security at age 62 will benefit most until age 77
(2) Social Security at age 66 will benefit most until age 80
(3) Social Security at age 70 will benefit most until age 86
How fixed income bond investors that have very little equity (stock) investments expecting a 2.4% return will benefit by claiming:
(1) Social Security at age 62 will benefit most until age 80
(2) Social Security at age 66 will benefit most until age 83
(3) Social Security at age 70 will benefit most until age 86
How individuals who invest primarily in equity (stock) expecting a 6.7% return will benefit by claiming:
(1) Social Security at age 62 will benefit most until age 92
(2) Social Security at age 66 will benefit most until age 95
(3) Social Security at age 70 will never reach “breakeven” age
Conclusion
For those that do not have substantial investment savings, the “Simplified Calculation” to determine when to start Social Security payments will be all that need be considered when thinking only about the financial aspects of when would be the best time to start Social Security payments.
For others who have accumulated a significant portfolio(s) of investments, there may be a need to draw on some of those investments during the time that you defer your Social Security benefits. That will cause those monies to be no longer invested and the loss of any potential future return that those monies could have earned.
Therefore, careful consideration should be given in determining whether taking Social Security benefits earlier will provide more in overall benefits by letting those investments earn returns for a longer period of time.
Greg Tinaglia
Last Updated: 10/11/2018