Winning Social Security’s Waiting Game

As more baby boomers move into retirement, there is increased interest in Social Security retirement benefits.  In particular, seniors must decide when to begin receiving their benefits.  Currently, the full retirement age (FRA) for Social Security is 66.  That age applies to people born from 1943 – 1954.  FRA gradually increases for younger workers, reaching 67 for those born in 1960 or later.

Full Retirement Age (FRA) – the age at which you qualify to receive 100% of Social Security benefits.  Social Security’s FRA varies depending on your birth year, but it ranges between ages 65 and 67.

You can start as early as age 62, but your benefits will be reduced.  Alternatively, you can start as late as 70, which will result in higher benefits.  If you start at 62, you would receive 75% of your FRA benefit; waiting after FRA increases your benefit by 8% annually.  (Starting younger than FRA will also generate reduced benefits for those with substantial earned income, followed by a makeup in later years.)

Example 1:  John Anderson is entitled to a Social Security benefit of $2,500 a month upon turning 66, his FRA.  If he begins receiving benefits at age 62, however, John’s monthly benefit will be reduced to $1,875 (75% of $2,500).  As another option, John could wait until he turns 70 to start receiving Social Security benefits and receive $3,300 per month (132% of $2,500).

Thus, deferring the start of receiving benefits from 62 to 66 increases John’s benefit by 33.3%.  Waiting longer still, from 66 to 70, increases his benefit by an additional 32%.  Using the eyeball test, John will receive an annual benefit increase of approximately 8% for waiting.  That government-backed hike may sound appealing, given the low interest rate environment that currently exists (i.e., CDs, money market funds and saving accounts pay next to nothing).

Closer Look

Running the numbers through a calculator, it turns out that the larger benefit is really a compound annual increase of just over 7%.  That’s still appealing in these low-yield times.

However, the percentage increase actually fluctuates as John ages through his 60s.  The periodic increases are fixed, as a percentage of FRA, but the deferred benefit increases in size as John grows older.

Example 2:  At age 63, Mr. Anderson would receive 80% of his full retirement benefit (FRA) amount:  $2,000 per month.  That’s a monthly increase of $125, from his age 62 benefit of $1,875, so John’s boost for the year is roughly 6.7%.  By starting at age 64, however, John would receive $2,166 a month, 86.67% of his FRA amount.  That’s an 8.3% increase for waiting that year, from age 63 to 64.

Crunching the numbers, the annual percentage increase decreases, rises and drops again until reaching a 6.5% hike from age 69 to a start at age 70. 

Measuring the Trade-Off

Another way to make a decision on when to begin Social Security is to see how much you give up by waiting, and how long the make-up period will be.  If John Anderson waits from 62 to 70, he will relinquish 8 years of benefits (96 months) at $1,875 per month, or $180,000.  He would then collect $3,300 a month, an additional $1,425, so he’d catch up in 127 months (or 10.5+ years).  By the time John reaches age 81, he would be ahead in total benefits collected, and the gap would grow in each succeeding month.

Example 3:  For another perspective, consider Kate Bennett, who also has a monthly FRA benefit of $2,500.  Kate continues to work, so starting before her FRA doesn’t make sense.  As previously noted, Kate could receive a Social Security benefit of $3,300 per month by deferring receipt until age 70.

However, Kate doesn’t need to wait that long.  By age 69, Ms. Bennett could start receiving a monthly Social Security benefit of $3,100.  In the first year, she would collect $37,200 in benefits.  By waiting until 70, she’d receive an extra $200 per month, so it would take her 186 months ($37,200 divided by $200) to catch up: 15.5 years.  Kate wouldn’t be ahead in total benefits until she approaches age 86.

Revising Your Outlook

The bottom line is that the ideal time to begin Social Security can be a moving target.  Starting at 62 may be a good choice if you need the income immediately, have health concerns, or just want to get something back for all the taxes you’ve paid in during your working years.  If you decide not to begin at 62, you might consider waiting until at least age 64 to realize the sizable 63-64 bump in benefits.

On the other hand, if you’re in relatively good condition, physically and financially, you may decide to postpone receiving benefits until after your FRA to get a larger monthly amount.  Remember that you’re not locked in to an age 70 start if you can delay; you can begin any time between the ages of 66 – 70, if deferring is no longer practical.

Keep in mind that these calculations are relatively simple as they ignore taxes on benefits, cost-of-living adjustments and any interim investment earnings.  If you need to explore this topic further, my office can provide detailed projections for your specific circumstances.

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