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Does It Make Sense to Wait Until Full Retirement Age to Start Collecting Social Security?

By JLP | April 8, 2010

I was looking around on the Social Security website and found their retirement estimator. For fun, I plugged in our numbers to estimate our benefit. This is what it spit out:

At your current earnings rate, if you stop working and start receiving Social Security benefits…

At age 62, your monthly benefit will be about…$1,763.00.

At full retirement age (67 Years and 00 Month(s) for you), your monthly benefit will be about…$2,543.00.

At age 70, your monthly benefit will be about…$3,162.00.

Because it’s not clear from the information posted above, I did a little research to find that these numbers ARE NOT adjusted for inflation.

The interesting thing to note is the difference in the benefit amount for waiting to take benefits at age 67 rather than 62. According to my math, the difference is about 7.6% per year:

RATE = [(2543 - 1763)1/5] – 1

But, by agreeing to wait, you lose out on some benefits (assuming a 3% COLA):

But, assuming you were interested in waiting, how old would you have to be in order to pass the point where waiting was to your benefit (your break-even age)? For this example, it looks something like this:

Of course, the real risk in waiting to collect is death. How likely are you going to live into your 80s? That’s anyone’s guess. My dad didn’t even make it to retirement age. My mom will end up collecting his benefits.

It may make sense to put off collecting social security if you have earned income that would put your benefits at risk of becoming subject to forfeiter for every year before you reach full retirement age (read How Work Affects Your Benefits).

One last thing, you can always take benefits early and if you decide you’d like the higher benefit, you can pay back all your benefits received and start over from scratch (read more here).

I just hope social security is still around by the time I retire.

Topics: Retirement Planning, Social Security | 15 Comments »


15 Responses to “Does It Make Sense to Wait Until Full Retirement Age to Start Collecting Social Security?”

  1. Travis Says:
    April 8th, 2010 at 2:55 pm

    If you are counting on social security and don’t have a lot of other money saved up, taking it as soon as you can is a no-brainer.

    Otherwise, you are playing the odds with your life expectancy.

    You earned the money, take it. There’s a reason the government gives you more, if you wait. A lot of people die and the government saves a lot of money!

  2. JohnB Says:
    April 8th, 2010 at 5:16 pm

    Another consideration is the very real possibility that SS benefits will be means-tested in the not-so-distant future. They simply won’t have the money to pay everyone’s scheduled benefits, so retirees with other income could see their benefits reduced. So, choose to take reduced benefits at 62 now or wait until 70 and perhaps have your benefits reduced anyway.

  3. Spokane Al Says:
    April 9th, 2010 at 12:05 am

    Perhaps another reason to begin taking SS early is if it allows one to postpone taking some or all from his/her other investments. Those investments not used would have the opportunity to continue growing which could negate the difference in SS benefits by a portion or even all.

    And that growth could help fill the bucket for those years beyond the break even point you calculated.

  4. Schatz Says:
    April 9th, 2010 at 7:51 am

    What about the income that would be earned through a job throughout the age of 62 to 67? Shouldn’t that be factored in as well? Or are you assuming that this income would come in regardless of the collection of SS benefits?

  5. Don Bollinger Says:
    April 9th, 2010 at 7:52 am

    There are two other things you might want to consider. One is taxes. If you have more income, say from ages 62 to 70 for any reasons, such as spending down non-IRA assets while letting Roth IRA assets accumulate, you may lower the tax bill on the SS payments later when yoy begin to take them.

    Second is investing the IRA assets. My calculation (which isn’t easy) suggests if you can earn 5.5% on the SS benefits or greater even including the tax bite, you will never catch up by waiting to collect SS later. That’s what I did.

  6. Paul Says:
    April 9th, 2010 at 9:04 am

    I believe the SS estimates are all in current dollars, so a retiree would get 7.6% + COLA increase for each year delayed. I have looked at this & for many people the value of delaying SS benefits is that is a way to maximize retirement income in their later years should their portfolio become depleted. The downside is if they die early, they will have foregone potential extra income since they didn’t reache the breakeven year. But then if they are dead, they probable don’t care. This strategy will only work if a couple has saved enough to allow them to not draw at age 62.

    Another option is to draw at age 62, but plan for one spouse (usually the higher earner) to repay all benefits received to the IRS. The IRS will then begin paying out at the higher rate which would have been achieved by waiting. This is an uncommon & little known option, but it can give a retiree an opportunity to make a change after he/she is 6-8 years into retirement.

  7. Paul Says:
    April 9th, 2010 at 9:07 am

    With regard to losing a portion of your annuall SS payment if you have earned over the limit between the ages of 62-67, any forfeited SS payments will be added back into your future monthly benefits on a prorated basis for life. I believe this adjustment would happen annually. So you don’t truly lose any SS benefit, it is just delayed.

  8. Paul Says:
    April 9th, 2010 at 9:15 am

    JLP, I believe you need to adjust the delayed monthly benefit ofr the COLA also. So rather than monthly benefit of $2,543, delayed retirement should start at $2,946/month. I am sorry I don’t have time to find a substantiating link for that.

  9. rubin pham Says:
    April 9th, 2010 at 11:52 am

    Travis Says:
    April 8th, 2010 at 2:55 pm
    If you are counting on social security and don’t have a lot of other money saved up, taking it as soon as you can is a no-brainer.

    Otherwise, you are playing the odds with your life expectancy.

    You earned the money, take it. There’s a reason the government gives you more, if you wait. A lot of people die and the government saves a lot of money!

    BEST ADVICE OF THE DAY!

  10. Sam Says:
    April 9th, 2010 at 4:09 pm

    “I just hope social security is still around by the time I retire.”

    It will still be around, it just won’t have any money. Unlike a bank account, the trust fund won’t be automatically closed when it has been empty for a while.

    My Friday afternoon gallow humor.

  11. Double My Net Worth Says:
    April 9th, 2010 at 4:36 pm

    I enjoyed how you broke this down by numbers. It is interesting to see because the majority of my elders have all lived to at least 90 years old which is beyond the chart you have detailed.

    The way you have broken it down makes it seem like social security benefits are helter-skelter (whatever that means, it sounds appropriate) for someone at my age (35).

    Whether it is still around or not when I do reach the minimum age is something that remains to be seen but it certainly is something to factor in if I also combine it with the minimum withdrawal requirements from my IRA as well as the Roth.

    I don’t know if I will get around to figuring this out now while in my 30s but I certainly will be looking into this when I reach my 50s. Hopefully, I will have your insight to draw from.

  12. DennyM Says:
    April 9th, 2010 at 4:57 pm

    …as mentioned above, factoring in typical life-expectancy — makes little actuarial $$ difference whether one takes the SS payouts early or later.

    However, the SS system (..and the Federal Government) is in such bad financial condition that radical political changes are certain (higher SS taxes, less SS benefits).

    So … ‘Take-the-Money-and-Run’ as soon as you hit 62.

    It’s your money, anyway… and the Social Security well is gonna run dry very soon.

  13. BG Says:
    April 9th, 2010 at 5:29 pm

    20 years to break even!

    Give up $120k for only a $500/month increase 5 years hence? Forget that, take the money early and run!

  14. Kirk Kinder Says:
    April 11th, 2010 at 8:44 am

    I concur with the general consensus here to take it early. It is a big risk that you won’t live to age 82 and end up leaving money on the table.

    Second, you can pass your assets to heirs so letting those assets compound will ensure your family receives more assets, whether that is the individual or his heirs.

    As far as social security paying, the fund is projected to be able to fund 75% of all benefits right now. So barring any further deterioration to the numbers, one can expect 3/4 of the benefit. This is what we should plan on for now. However, I wouldn’t discount a means test although that could be challenged legally.

  15. David M Says:
    April 11th, 2010 at 4:15 pm

    Rather than a “Means Test” all they have to do is change the law so that it all becomes taxable from the first dollar. That way everyone gets what they earned, however, those with other sources of income, start giving the money back in the form of taxes.

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