There’s more about deciding when to start Social Security than just finding out how early you can take it— much more.
Say you’re turning 62 and you’re wondering if you should start taking Social Security. You’re almost 65 and making decisions about Medicare and thinking about how to pay for it. Another scenario might be that you were born in 1957 and ask yourself if you should wait until you’re 70 to start taking Social Security income. Thoughts like these are occurring to 10,000 or more people every day, according to the U.S. Department of Health & Human Services.
First, I want to apologize in advance for a very numbers-driven article. If there was another way to tackle this subject, I would have done it that way. This is likely to be one of the biggest financial decisions you are ever going to make. I’d like to give you the information you need to make the choice that’s best for you — and your spouse, if you’re married.
When I say one of the biggest decisions, it’s not an overstatement. If your benefit is a typical $2,000 a month at your full retirement age, over a normal life expectancy and with cost-of-living adjustments (2.77 percent) you will receive $624,000. If we add a spouse, that total will grow to a million dollars or more.
1. Social Security Growth
Before we can dive into when you should start your benefits, let’s look at how Social Security grows, on a scale from collecting early to taking it at its maximum benefit. The three ages you need to be concerned about: 62 for early benefits, Full Retirement Age (FRA), and maximum benefits at age 70.
Let’s look at the facts:
- SSI eligibility starts at age 62 with a reduced benefit.
- Full Retirement Age (FRA) is gradually increasing to age 67 for those born after 1955.
| Born in | FRA | % of benefits reduced at 62 |
| 1955 | 66 and 2 months | 25.83% |
| 1956 | 66 and 4 months | 26.67% |
| 1957 | 66 and 6 months | 27.50% |
| 1958 | 66 and 8 months | 28.33% |
| 1959 | 66 and 10 months | 29.17% |
| 1960 | 67 | 30.00% |
- Delaying benefits increases them by 8% a year between FRA and age 70.
- The surviving spouse gets the higher of the 2 benefits in the household.
Here’s a link to the Social Security Administration (SSA) website with the full details.
Working while collecting your benefit before FRA will reduce your benefit amount $1 for every $2 you make over $19,560 (in 2022). Special rules apply for the year you reach FRA. They will deduct $1 for every $3 you make over $51,960 (in 2022) up to the month you reach your full retirement age. After you reach, FRA there are no reductions for working.
I suggest you read this brochure from the SSA, “How Work Affects Your Benefits” (PDF) if you’re thinking about collecting benefits while working. In general, working a full-time job that pays more than the limit and collecting your benefits is usually a bad idea. Possible taxes on your benefits, a giveback for excess earnings, and locking in a lower benefit for life all make it difficult to see how it could be the best choice for more than a very few people.
Pro Tip: In almost every case, working a full-time job and collecting benefits before Full Retirement Age is a bad idea.
These next factors are not in a specific order and need to be looked at together when making this choice.
2. Think Beyond Breaking Even
The break-even argument is often the wrong focus. Most people focus on only this one aspect when they consider when to start taking their Social Security income. Breakeven is the age where they will have received all the money from their higher benefit that they deferred in the intervening years by waiting until FRA, or even age 70. Many people fear they won’t live long enough to collect the higher benefit. I’ll put that argument aside, and we’ll talk about it later.
The key here and in all discussions about when to take Social Security is cash flow. The math on this is simple: You won’t receive enough in your monthly benefits to make up the difference of the 25–30 percent higher amount you will receive by waiting for FRA. If you save every dime you receive from taking your benefit early, even if we ignore any giveback or taxes you might owe(yes, your Social Security benefits may be taxable), the income that money would generate won’t make up the difference at a reasonable distribution rate. Let look at an example:
Imagine that you’re a 62-year-old whose full retirement benefit at 67 would be $2,000. You receive $1,400 at age 62. Over the next 5 years, you receive $84,000 ($1,400 x 60 months) and invest it. You would have to take more than 8.5 percent of the account each year to equal the $600 you would get in the higher benefit at FRA.
This is unsustainable, and you won’t get a cost-of-living increase at that rate. You could take more, knowing you’ll run out hoping you won’t outlive it, but why take the risk if you weren’t going to use the money to live on while you waited until FRA?
The argument goes that it will take almost 12 years to get back the higher monthly benefit that you didn’t receive by waiting until FRA. As a planner, I always hear, “What if we don’t live that long?” My answer is always the same “What if one of you lives longer?”
Keeping with the example from above, when you look at waiting until you reach the maximum benefit at age 70, the difference grows even faster. You get a bit more than 25 percent extra each month by waiting just 3 more years.
I understand that there are many that may not be able to wait that long. They may not have the assets and income needed to live without SSI benefits.
Pro Tip: Those that are planning and have the means, waiting and using your own assets for the last 3 years until you reach age 70 can make a substantial difference. Remember, for most people, it’s not the total of your assets because cash flow is king in retirement.
3. Use Your Family History As A Guide
Let’s be clear, if you can tell me when you’re going to die, I can tell you exactly when to take Social Security. Since none of us have a crystal ball or a time machine, we must rely on life expectancy. We also need to take your family history into consideration. Your family may have a long history of chronic medical conditions that have led to shorter lifespans. You could have a limited outlook due to your own severe medical condition. If this is your situation, it means a choice to take Social Security early might be in your best interest, although your spousal benefits also need to be considered if you’re married.
Aside from these situations, let’s look at the facts from the National Institute of Health, dated 2020. Averaging all people in the country without considering health or ethnicity, a man in the U.S. has a 50 percent chance of living to age 83, and a woman has a 50 percent chance of living to age 87. Jointly, one of them has a 50 percent chance of living to age 92. This means that starting Social Security early could be a decision you have to live with for 30 years — 14 years beyond when you would have broken even by waiting for FRA.
Pro Tip: Starting early in this case means that the total of your lifetime benefit to age 92 would only be $436,800. That’s $187,200 less than waiting for FRA!
4. Consider The Spousal Benefit From Social Security
What’s left for your spouse? Often the fear of not living long enough clouds the decision-making process, especially for married couples. When both benefits are similar amounts, they are often both taken at the same time. This ignores the rules for surviving spouses that allow them to receive the higher of the benefits. The SSA website section on survivors states, “Widow or widower, full retirement age or older — 100% of the deceased worker’s benefit amount.”
This means that the decision to start early or wait until age 70 affects you and your spouse if you’re married. As a planner, I encourage married couples to wait until FRA or age 70 to take the higher of the two Social Security benefits. This maximizes the income for the surviving spouse. Remember, they are already losing the lower benefit. Maximizing one benefit will make a substantial difference when one of you is gone.
Pro Tip: If you’re married, wait as long as possible to take the higher of the two Social Security benefits.
5. What Is COLA And Why You Need To Know
Social security normally grows by a cost-of-living adjustment, or COLA. The COLA for the year 2022 was 5.9 percent, the second largest is the last 40 years. The average COLA over the last 40 years has been 2.77 percent, although the last 10 years has been much lower than that.
We must go back to the hated subject of math to illustrate my point that waiting is better. If your benefit is $2,000 at FRA, in 20 years it will have grown to $3,482. If you were to start early at 62 with a $1,400 benefit, it will only grow to $2,437. It is simply that a larger number compounds faster.
6. Future Of Social Security
What happens when the Social Security Trust Fund runs out? According to a 2021 CNBC article, the Social Security Trust Fund is being depleted faster than worker taxes can replenish it. Because of the pandemic, recent and projected large COLAs, and the long-term demographic changes, the trust fund is now projected to run out in 2033. This will have dramatic impacts to your SSI benefits.
Without congressional action, benefits will be cut by 20 percent, although some say it could be even more. The bottom line is that those of us facing this decision in the next 10 years must account for this possibility. If this plays out as projected, those who took their benefits early will receive little more than 50 percent of what they would at their FRA. Those that waiting until their FRA will receive slightly more than their early benefit. Only the people who chose to wait until age 70 can expect to receive anything close to their full benefit. Since life expectancy for couples who are new retirees is almost 30 years, waiting to take full benefits seems more important than ever.
It’s easy to see this is not a clear-cut issue. Deciding on when to start your benefits is one of the largest decisions you will ever make. Take your time, consider all the factors, and don’t let fear rule your choice. It’s advisable to talk to your financial planner who can help you look at the bigger picture.
Choose wisely.
