Retiring Early? When Should You Start Taking Social Security Benefits?

I took my kids to the library the other day. While I was waiting on them I took a minute to browse the business/personal finance section. I haven’t been in that section in a while because they never seem to have anything that is younger than 5 years old. I don’t know about you, but there doesn’t seem to be a lot of useful information in a personal finance book that is 5 years old. Anyhow, I came across a book that I remembered seeing in the bookstore recently and decided to check it out. It’s a book by Steven Silbiger and the title is Retire Early? Make the Smart Choices, which as you can tell, is about retirement planning. What I found interesting was the author’s discussion of Social Security and the things you should consider when deciding when to begin receiving benefits. It’s a tough decision and the answer isn’t always clear.

In the introduction of the book, the author lists the seven key issues that affect the decision to begin taking benefits early. They are:

1. What are the benefits available and what is the penalty for early retirement? What is the risk if you make the wrong decision?

Most likely you can find out this information through your Social Security statement that you should be receiving once a year (usually before your birthday). The statement will show you what your expected benefit should be based on your retirement age.

2. How’s your health? How long do you expect to live? How well is your spouse? What are the key health risks and how do they affect you?

If you are in poor health, you might want to take your benefits sooner rather than later. The Social Security Administration’s website has a life expectancy table that you can use to give you an estimate of how long you could be receiving benefits. The table assumes you are 65 years old. They also have a break-even age calculator that will show you how much longer you would have to live before you break even by delaying benefits.

3. Are you married? The early retirement penalty to the spouse could be 67 percent of the spouse’s benefits.

4. Are you planning to continue to work while receiving benefits? If you work too much, you could lose out on a lot (or all) of your benefits.

It’s crazy but if you begin receiving benefits before your Normal Retirement Age (NRA) but continue to work and you make over $12,960, you will lose $1 for every $2 of earnings in excess of $12,960. Ouch! And, according to the website, if you reach your NRA in 2007, you will lose $1 for every $3 of earnings in excess of $33,440 for the months prior to the month of your NRA attainment (thanks to commenter Dave for the clarification). The income amounts are indexed for inflation and therefore change yearly.

5. What are your cash needs for retirement? Will your benefits be extra spending money or a major lifeline?

If you don’t need the money, it makes sense to hold off receiving the benefits as long as possible.

6. What forecast do you have for your own investments? Is having extra money now more important to you than more money later?

It seems to me that this question is the same as number 5.

7. How concerned are you about the projected insolvency of the Social Security system?

There’s no sense in waiting if you don’t think the program is going to survive. However, if you are retirement age, put yourself in the shoes of us younger generations who are going to pay in a heck of a lot more in to the system than you did with even less of a chance of receiving benefits. Of course, I’m not complaining because I never had to go to war.

So those are the key issues the author talks about. He then goes on to address each issue in broader detail. The first chapter of the book is worth the price of the book becuase of the way the author walks step-by-step through an example of how he helped his friend figure out which path was best for her. This is a great topic that I hope to research and post on further.

24 thoughts on “Retiring Early? When Should You Start Taking Social Security Benefits?”

  1. I consider it a priorities question unless you absolutely need the cash flow now to make ends meet. If not, than what’s more important: leaving the most money possible to your heirs if you die sooner rather than later, or ensuring you maximize income in the event you live longer than anticipated?

  2. Point 4 overstates the penalty where it is talking about the $1 for every $3. Here is what the web site says on the topic.

    If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2007 that limit is $12,960. [this part was correct in the article]

    In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit, but we only count earnings before the month you reach your full retirement age. If you will reach full retirement age in 2007, the limit on your earnings for the months before full retirement age is $34,440. (If you were born in 1942, your full retirement age is 65 years and 10 months.) [this is where the article was wrong]

    Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings. [the article didn’t mention this, either]

  3. I am 61 and as a finance professor teach students do time value of money calculations. Here’s a good example: According to my statement from social security, if I retire “early” at 62 I would receive $1,520 per month, at 66 I would receive $2,026 per month and if I wait until I am 70 I would receive $2,675.

    If I live to 85 (approximately my actuarially expected date of death) and I assume a discount rate of 5.2% (today’s rate on 20-year treasuries), the table below gives the present value today of my expected future payments:

    Retire at 62: $235,000
    Retire at 66: $229,000
    Retire at 70: $212,000

    Adjusting for taxes changes the absolute values, however, the relative proportions don’t change unless one assumes higher or lower (ha ha) tax rates farther out in the future.

    Considering the $1 for $2 penalty from 62 to 66 and the reduced value for waiting until 70 (given current interest rates and longevity expectations), I expect to start taking payments when I turn 66.

  4. boy, you can bandy this one around forever. my answer – take it as soon as possible. if you don’t need it – bank it and save it. in your example using 5% interest from a cd for example. at 62 you take $18240, by the time 66 rolls around, that annual amt plus interest for 4 yrs has turned into a head start of $82500 approx.

  5. Muddlehead, you make my point. If you had a head start of $82,500 (in a tax-deferred account) when you turn 66, that would yield a monthly payment (at 5.2%) of $570 until you reached 85. That $570, when added to the $1,520 you would be already receiving woud give you a total monthly income of $2,090 until you reach 85, which is very close to what you would get if you waited until 66.

  6. I always snicker at stories about social security. Seeing how I’m several decades away from thinking about retirement (barring a windstorm of investment success), I’m of the opinion that SS won’t be there when I’m of dispursement age.

    I’ll just keep looking at SS as a tax and hope that it’s privatized in the future.

  7. tom and thomas – tom. i’m glad we agree. thomas – i’m 52 – and i don’t consider ss in my financial planning. if it’s there, i’m taking it as in answer number 6. if it’s not, i won’t miss it.

  8. Tom:
    When you calculated the NPV of your Social Security benefits, did you factor in the effect of cost-of-living-adjustments to SS benefits?

    If inflation and COLA are 3.5% and the long term discount rate is 5.2%, wouldn’t the NPV calculation be more accurate with the difference, or 1.7% (if you want to think in terms of today’s dollars when making a comparison)? Might not be exact. Put another way: will the NPV figures you gave when invested at 5.2% produce an income stream that adjusts upward by 3.5% (or whatever) until you’re 85? Or will the NPV figures only produce a stream of constantly deflating dollars? SS does take away some of the inflation risk.

    Also, I have a bit of problem with planning retirement based on my life expectancy. I figure if I do that, then there’s a 50% chance that I’ll end up eating dog food for some period of time, and a 50% chance of leaving something to my heirs. Better to plan for longer. While leaving something to my heirs is not important to me, avoiding the alternate menu choice is. So assuming SS is still there, it takes away the longevity risk for an individual.

  9. EMT, you are correct that I did not include the cost of living increases, however as long as SS is tied to inflation the real (after-inflation) value of the payments should be unaffected to a first approximation. (Of course this assumes that the government’s measure of inflation used to adjust SS is an accurate reflection of inflation and if you believe this I have a bridge to sell you.)

    You are also correct that doing retirement planning assuming a life expectancy is fraught with risk if you must eat into your principal in order to fund your living expenses. The ideal is to be able to live on the income stream alone with the principal still growing at the inflation rate. Then you will never run out and also leaves the principal for your heirs. Getting to this point, however, is pretty tough for someone who has waited until late in the game to start seriously saving. The risks of different life expentancies on the value of the SS payments is less of an issue and shouldn’t affect menu choice too much.

    My point on the PV calculations was not to indicate the absolute present value of the payments, but to show that the relative amounts of value you get are pretty much the same whether you start taking your payments at 62, 66 or 70. The present value of your payments to the government is essentially the same (which is why the amounts are set where they are). The government doesn’t really care what you do, it’s all the same to them.

    For individuals what matters in deciding when to start SS payments are the “side issues” like whether you will be earning more than $13k/yr between 62 and 66 (and if you are not, how would you be able to save the payments like muddlehead says, anyway?), how long you expect to live and whether you believe taxes will be higher or lower later in your retirement, and most importantly, how much (not whether) Congress will reduce benefits down the road because of funding issues.

  10. If you don’t need the money, it makes sense to hold off receiving the benefits as long as possible.

    This is false unless you expect to have lower income in the future. Taking it sooner allows one to limit withdrawals from other accounts, improving survival probability. You will likely be able to do better on your investments than SS which after all, is limited to treasuries.

  11. Tom – great calcs, thanks! One suggested variation: what are the absolute values assuming different death dates? No need for year by year, but might be interesting to compare death at 70, 75, 80, 85, 90, and (one can hope) 95 or even 100.

    With regard to others assuming no Soc Sec: it is the only rational course for someone under 50. The irony is: I wonder if the gummint takes into account those expectations (well, most folks aren’t planning on getting it anyway, so let’s just take it away, as they expect!). Irony #2 will be that as taxes are raised, folks (that can) may be more incented to…retire early! Other unintended consequences are sure to arise.

    I would gladly forego all rights to any dollars I have paid in so far (around $140,000 so far, according to Uncle Sugar) or was planning to receive if I could get out of the system *right now.* I would even likely forego such “rights” and all other future benefits for cutting my tax in half and agreeing to no future increases (i.e., continue to pay w/o expectation of benefit), THAT is how pessimistic I am about the future of the program…

  12. Thanks, Hieronymous. Using the same input parameters including 5.2% discount rate, the PV today of starting in 5 years at 66 and assuming death at:
    age PV
    70 $69k (bummer)
    75 $136k
    80 $189k
    85 $229k
    90 $260k
    95 $285k
    100 $303k

    The PV today of starting in 9 years at age 70 and assuming death at:
    age PV
    70 $0k ( real bummer)
    75 $90k
    80 $159k
    85 $212k
    90 $253k
    95 $285k
    100 $310k

    As you can see, someone who is now 61 would have to live to more than 95 to come out ahead if they wait until 70 to start rather than start at 66, even with the larger payment size. However, the more important point is that the values are pretty similar (assuming you don’t die in your 70’s) and other factors like future tax rates and benefit reductions made in the future by Congress will be much more important and these also would lead one to start taking payments as soon as they can be taken without the $1 for $2 penalty.

  13. It seems to me that you have to look at this with your spouse’s benefits in mind too. I was originally thinking of taking my benefit at 62, based on NPV calculations, but am now looking at waiting until I get a full benefit at 66, so my wife’s benefits are higher both while I am alive and when I am not.

  14. –Tom–
    I got a chance to do my own number crunching. First, I calculated NPV for your figures to age 85. I got:
    Age 62: $232340
    Age 66: $227470
    Age 70: $211550
    The results are similar to yours. The difference may be in the compounding intervals, and whether transactions occur at the beginning or end of a period.

    Then I recalculated NPV, based on an interest rate of 1.7% which is the difference between the 5.2% you used and a Social Security COLA of 3.5%. The results for NPV:
    Age 62: $341223
    Age 66: $362624
    Age 70: $364956
    This shows an increase in NPV for waiting to retire. And that the COLA is important. You suggested ignoring COLA if it matched inflation, but your discount rate should also be adjusted for inflation.

    Also suggests that the break-even age is less than 85 years of age. Perhaps the 75 -78 years of age on the calculator provided on the SSA website.

  15. Excellent point, EMF. A lower discount rate reflecting inflation adjusted return makes more sense. Actually the best way to calculate this would be using the “dividend discount model” assuming constant growth of payments and today’s nominal interest rate, but I think we have beat this one to death.

    The bottom line is that all the differences in these calculations are overwhelmed by the uncertainties of the actual size of the future payments since Congress can do anything they choose. Since there is much more likelihood that because of funding issues SS payments will be reduced than increased in the future (either directly or through higher taxation or by extending the means testing), all signs are that one should start taking payments as soon as possible after the $1 for $2 penalty period is passed (currently 66).

  16. Concerning when to take Social Security benefits, the Boston College Center for Retirement Research ( ) has some research in their publications section that addresses this subject. In particular, see “SHOULD WE RAISE SOCIAL SECURITY’S EARLIEST ELIGIBILITY AGE” by Alicia H. Munnell, Kevin B. Meme, Natalia A. Jivan, and Kevin E. Cahill. ( )

    Munnell, et. al. state that payments are set to be “actuarially fair” with respect to taking benefits earlier than full retirement age, which ranges from 66 to 67 depending on your current age. Obviously, you can model the problem with a range of investment return assumptions that will seem to shift the decision one way or the other. But, if you start with the presumption that the payout model is set up to be neutral for the average person, then you need to determine how you in particular (and your spouse) might differ from the average.

    Assuming that you do not absolutely need the money to live on, then you might make this timing decision on other factors. Some of the more important factors that comes to mind is relative health and history of longevity in the family. If you and/or your spouse are relatively more (less) healthy than your peer group in your early 60s (when you are first faced with this decision), you might choose to delay (accelerate) accepting Social Security payments. Similarly with family longevity. No matter what, it’s a crap shoot from the standpoints of health, longevity, investment returns, etc., because the future is fundamentally unpredictable.

    My two cents, The Skilled Investor

  17. The gist of the article is a comparison of
    (1) the cost of an inflation-adjusted two-life annuity in the open market which is equal to the increased benefits from waiting a year past Normal Retirement Age to start collecting
    Vs (2) the cost of the benefits you give up during the one-year waiting period

    The article points out that for a married person, the cost of the SS benefits lost waiting for a year is less than the cost of buying the annuity on the open market.

    Being a single person, the cost of a single-life annuity is less. But running the numbers, I also would come out ahead by waiting a year. And if SS benefits drop to 75% of what they are now, I still come out about even.

    Who loses out from such an approach? Your heirs, if you die earlier. I don’t think that is an important consideration. Best thing you can do for your heirs is manage your retirement so you don’t depend on them.

  18. I should clarify that my comments in #21 were in references to the link that Andrew gave in comment #20.

    My link above from this comment to to a post on my blog that explores in greater detail the possible benefit from delaying SS benefits.

  19. Re: losing some of your benefits if you earn too much. My understanding is that you don’t really lose anything in the long run. The reduction in benefit is not a reduction in what you get each month, but your benefit is reduced in that you don’t receive a payment every month. Let’s say you “lose” 50% of your benefit due to earnings in a year. You’ll receive a payment for 6 months and no payment for the other six. Those six months are then added to the age that you retired for the purposes of calculations. At full retirement age, you would receive the benefit amount you would have received had you retired at 62-1/2 rather than 62 (if that happened for only one year).

    Also, the money you earn helps raise the payment later on.

  20. I’m a member of a ‘new wave’ forming out here.

    I just turned 62, I’m a self-employed professional woman and 1.) in the last thirty months I mined my entire retirement provisions EXCEPT SS to pay for the protracted (and otherwise unfunded) end-of-life costs of both a 95 year old parent and a partner; 2.) being of necissity absent from it, my business is stalled, and 3.) I’m emotionally and physically exhausted from it all.

    Any comments on how to evaluate whether I benefit more if I claim SS now at 62 with its attnendant penalties – which will still require additional income to live — or cobble together a new business or other (modest) employment for the next four and a half years?

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