When Should You Begin Taking Social Security?

August 8, 2008

I received this information in an email from Jeffrey Voudrie, author of the website, Guarding Your Wealth. You can subscribe to his email newletter by clicking here (be sure and tell Jeffrey that JLP sent you). I highlighted the parts that I thought were important.

When To Start Social Security Benefits

Conventional wisdom and many financial planners say that you should start taking Social Security benefits as soon as you are eligible. For many, that is at age 62. This is another time that conventional wisdom may be wrong. Read on to see whether you should delay receiving those benefits.

A bird in the hand is better than two in the bush, right? There’s no guarantee that you will be able to catch the birds in the bush and you know that you already have a bird in hand. If that bird represents your next meal then you’d be a fool to let it go in hopes of catching several birds in the bush.

On the other hand, if you have enough birds in the freezer to feed you for several months it might be worth taking the chance on the multiple birds in the bush. Better yet, is there a way you could have both?

If the bird in question is your social security benefits, you may do better waiting for the birds in the bush. This is especially true if you have enough money in savings to meet your needs for the next several years. Even if it means spending down your principal to postpone the date you start benefits, you may be far ahead in the long run. You’d get the bird in hand and the ones in the bush!

On the other hand, if you aren’t able to meet your needs based on what you’ve set aside, than the bird-in-the-hand (taking benefits at age 62) is the better choice. Regardless of when you start Social Security payments, make sure you don’t delay receiving Medicare.

Conventional wisdom says that you should take benefits at age 62 because you can invest that money and earn a better return then Social Security does. We’ve all heard how the average return on the Social Security Trust Fund is only 1%, right? Wrong.

You can earn a guaranteed 8.25% per year by delaying when you start receiving benefits from age 62 to age 66. And it doesn’t depend on what the stock market does. It doesn’t matter what happens to interest rates.

Taking benefits at age 62 results in receiving only 75% of the amount you would get if you wait until you turn 66. Every year you wait, the amount you receive increases. By waiting until age 66, the annual increase averages 8.25% per year.

The average annual return you are guaranteed by waiting until age 70 is 10% per year. Benefits increase 8% every year past age 66. Waiting from age 62 to age 70 results in monthly payments that are 81% higher.

If you or your spouse lives beyond age 79 then you will be better off delaying benefits. Average life expectancies indicate that roughly 50% of those age 62 today will live beyond age 80. Medical advances will only increase that over time.

The risk of delaying benefits is that the main breadwinner may die prior to your breakeven age. That would still result in higher monthly payments to the surviving spouse who may live much longer. You can also use low-cost term life insurance to make up for the lost benefits.

Many of those retiring today have not set aside enough to provide for themselves and their spouse for the rest of their lives. Some face the prospect of draining their retirement savings and living just off of Social Security if they live beyond their 80’s. Even if you will use up your savings more quickly in the short-term, delaying the start date until age 70 could significantly improve your Social Security lifestyle.

There’s no way to tell with certainty what the best decision is for you because none of us know our life expectancy. If you think, based on your family history and present health that you will live beyond age 79 and you have enough assets to provide the money you need until age 65 or 70, then you may want to wait.

Some insurance companies recommend buying an immediate annuity to provide a payment equivalent to what Social Security would otherwise provide, but I don’t recommend that approach. Such annuities are expensive and cause you to lose control, access and flexibility of your money.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Read more financial and investment articles or get a personal response to a financial question.

This is definitely something to think about. Of course it’s still decades away for my wife and me but we’re planning to put off receiving Social Security as long as possible. It’s also our plan to not need Social Security in the first place since there’s really no guarantee that the program won’t be means tested by them.

14 responses to When Should You Begin Taking Social Security?

  1. Have you read about the “Do Over strategy”? I just recently started reading some about it.

    If you think you will live into your 80’s and you can live without the social security income until late 60’s, the best option is the Do Over strategy. The SSA allows you to begin withdrawing at age 62 and then at anytime(up to age 70) you can pay that money back and then start receiving SSA payments calculated at the your current age. That means you could earn interest on your SSA money up to 8 years and then start receiving payments 75% higher than before. It’s a way to start over, but the down side to it would be if you die in your early 70’s.

  2. Ken wrote:

    “Have you read about the ‘Do Over strategy’? I just recently started reading some about it.”

    Yes I have. I blogged about it here. It can work as long as you have the funds available to pay back Social Security.

  3. Frankly, unless one is terminally ill or has a family tree full of folks who dropped dead in their ’60’s (Oops–come to think of it, that would be MY family tree–but then we’re talking about strokes had by folks who did not treat their high blood pressure. I’m definitely gonna keep popping those little green pills!), I cannot think of a financially good reason to take Social Security benefits at age 62.

    The plan never to need Social Security benefits is a good one, but not feasible for those of us getting a later start on our savings.

  4. By the time that folks in their early fifties and below reach retirement, it is highly likely that the Social Security system will have implemented “means testing”, i.e., your eligibility and size of your benefit will be based on your other income and/or your benefits will be taxed to oblivion because you have other income. Thus, the decision process as to when you will apply for benefits will be highly tax-dependent, something you should begin planning for now. For those who are close to retirement and considering taking benefits at 62, do not overlook the potential effect of that decision on a dependent spouse who may outlive you and need those survivor benefits.

  5. This is very good information for all who are going to have to make a decision as they are nearing retirement age.

  6. The 8% figure fails to account for the reduced life span and the age 79 figure fails to account for the earnings on the distributions.

    Married couples can do best by the lower paid spouse take it early and the higher paid one later. Individuals should rely on their personal life expectancy relative to median which at 66 is 86. Most people should have a good idea of their life span by middle age. The other concern is they may more use for it early when they are healthy enough to travel and spend it.

  7. take it as early as you can. if you don’t need it, save and invest it.

  8. Social Security came out at a time when most people only used it for a few years. As you have written JLP, it was never intended to be a retirement pension program. When Social Security was implemented, the life expectancy of males from 1931 – 1941 did not go over 60. If anything, it was developed at least with the initial mindset of helping to keep those too old to do manual work from being in abject poverty.

    The way it has been setup, many people actually depend on Social Security as their retirement fund and it was never set up as such. For someone like myself, a Generation Y’er I am completely not counting on Social Security.

    The incentive for the government right now is to stay liquid given that we are quickly approaching the $10 trillion federal debt mark. From the looks of this program, they are making a bet people will hold off long enough where their return is less than if they take it out early based on life expectancy (sort of like an insurance company would do).

  9. Planners are going to be hearing this question a LOT over the next decade as more and more of the baby boomer generation start hitting their 60’s. I always recommend postponing benefits for as long as you can afford to live without them. It’s amazing how much delaying a few years will increase the monthly amount.

    Sadly, most people start withdrawing as soon as they are eligible regardless of whether they need to or not. Many… scratch that, MOST of the boomer generation didn’t take advantage of other great retirement planning vehicles or learn about retirement planning in general. Those that are dependent on social security are going to have a pretty paltry retirement. A little education could have gone a long way. A good resource for beginners that want to learn about tax free investing vehicles is http://www.money-and-investing.com/Roth-IRA-Limits.html

    Great article, hopefully it will convince a few people to delay benefits!

    Cheers,
    Odd Lot

  10. …take the money & run, at age 62.

    There is high risk that Congress will change the current eligibility rules for Social Security — to keep that shaky system afloat.

    You must factor in that ‘political risk’ !

    Means_Testing, higher age eligibility (70 years old to even begin collecting benefits), and reduced benefits… are quite likely some or all the options Congress will enact over the next 10 years.

    Note the U.S. Supreme Court has repeatedly ruled that Social Security is merely a tax — and that any benefits are paid solely at the whim of Congress; workers who must pay the 12.4% taxes have NO legally enforceable right to any benefits at all.

    You have no legal right to that money, you can’t leave it to your kids/loved-ones if you die, and what you get (if anything) is purely at the discretion of the 535 politicians… who are warming chairs in Congress at any given moment.

    Take the money as soon as you can get it — most 62 year old Americans do just that.

  11. Hi,

    I think you might have calculated the “return” incorrectly. Social Security is basically a lifetime annuity from whenever you start taking it. The later you take it, the higher the monthly payments — but your expected lifetime is constant, so you are receiving the monthly payment over a shorter period. With a life expectancy of, say, 80 years, someone who starts payments at age 66 can expect to get just about 3/4 as many months of payments as someone who starts at age 62.

    In other words, the 75% thing mostly just reflects the fact that you’re getting the payments for a much longer period if you start early. The actual “return” (i.e., the excess increase in monthly payments over the amount needed to exactly account for the shorter time one will spend on social security) will approximately the prevailing interest rate on Treasury debt. This is because, by law, the Social Security trust fund can only “invest” in Treasury debt, and so it uses this return to calculate how much payments should be increased for people who delay taking their benefits.

    Because the return on Treasury debt is extremely small and too conservative, even for most retirees, it is unlikely to be beneficial to delay taking Social Security. One would do vastly better to take the money early and *invest* it according to an appropriate asset allocation, e.g. 50% stocks, 50% bonds, or even 30%/70% to be extremely conservative. The return on this will much exceed the actual return on Social Security, and with not much added risk.

  12. jlp, 2 down, many to go. 1. stay away from annuities. 2. take soc sec at the first possible moment.

  13. My mom has been reconsidering her withdrawal plans lately. There’s really no need for her to start taking Social Security until my dad retires (planning to do so around 65-66 if possible). However she’s now 62 and the doctors have given her 3 or 4 years left to live.

    So, she doesn’t precisely need the money, but she’s thinking about taking it anyway because it’s not like she’ll be around much longer. If she’s unable to teach her one-day-a-week class, SS income might replace that too. I would advise against it for my dad, but I told her that her reasoning made sense…

  14. Hi friend , Thanks for providing nice information it is useful for us.

    Thanks a lot.