When to Start Collecting Social Security

The week before last The New York Times carried a piece on when a person should start collecting Social Security. You kids who read blogs probably didn’t even know there was a choice about when to start getting those checks or that it significantly affects how much you get.SocialSecurityposter2

Basically, the longer you wait, the higher the monthly payment. According to the Social Security Administration’s example (quoted in the article without attribution) a person whose "full retirement age" is 66, and would get $1000 a month starting then, could instead have $750 starting at age 62 or $1320 at age 70.

This dilemma, less now or more later, is faced by all those who would receive Social Security payments, which is to say just about all Americans. (We assume.) And yet it does not get that much attention. Why? Because it’s complicated. There are a lot of moving parts, including some counter-intuitive rules and strategies involving spousal benefits.

But at its core, this is not that mysterious a problem. Assuming that a person has the financial resources to wait, the first issue to consider is longevity. The average life expectancy for a 62 year-old man is 81. (It’s 84 for women.) If you’ve got good and strong reasons to expect to fall short of or exceed that benchmark, then this consideration will dominate all others. If you don’t expect to live long, start payments now. If you expect to live a good long while, wait as long as possible.

If you don’t need the money right now to pay your bills, and you don’t think your expected longevity is particularly different from the norm, then what? You’ve essentially got the choice of a number of annuities starting at different ages. That’s not as hard a problem to get your hands around as it might seem.  (And as the Times article would have you think.) Annuities are a standardized product. And there is a website (ImmediateAnnuities.com) that will give you a rough quote for an annuity that pays $X at age Y. Using it, I’ve made the following table.

Age Monthly Payment Annuity Cost PV @ I+2% PV @ I+5%
62 $ 750 $ 116,454 $ 116,454 $ 116,454
63 $ 800 $ 121,877 $ 119,487 $ 116,073
64 $ 866 $ 129,309 $ 124,288 $ 117,287
65 $ 933 $ 136,407 $ 128,539 $ 117,833
66 $ 1,000 $ 142,825 $ 131,948 $ 117,502
67 $ 1,080 $ 150,769 $ 136,556 $ 118,131
68 $ 1,160 $ 157,951 $ 140,256 $ 117,865
69 $ 1,240 $ 164,373 $ 143,097 $ 116,817
70 $ 1,320 $ 170,255 $ 145,311 $ 115,235

The first two columns are the SSA’s age and sample monthly payments. The third column is what an annuity that would pay that amount for a man of that age would cost right now, according to ImmediateAnnuities.com.

Before I go further, it should be pointed out that this is not exactly apples to apples, as the Social Security annuity is indexed to inflation and these quotes are for flat non-indexed annuities. Inflation-indexed annuities are, of course, worth more, but the website does not give easy quotes for those, so I’m going to assume that these numbers are indicative of the proportionate costs of inflation-indexed annuities.

It’s pretty obvious that $1320 a month to 70 year-old is worth a lot more than $750 a month to a 62 year-old. Really a lot more. But that’s not exactly the question we want to answer.  We want to know which is more valuable: $750 a month to a 62 year-old or $1320 a month to a 62 year-old starting in eight years. In other words, would you rather have $116K now or $170K eight years from now?

That is an elementary question of present value. To price $170K in eight years you need to find how much you would need to invest now to have that much in the future. If your rate of return on the investment was, for example, 5%, then you would need to invest about $115K today to have $170K in eight years, so the present value of $170K would be about $115K, remarkably similar to the value of the $750 starting now annuity.

Except that the $170K in the table is an inflation adjusting moving target. The 62 year-old isn’t really choosing between $750 now and $1320 later. He’s choosing between $750 now and some larger payment in the future worth $1320 in today’s dollars. So the rate of return on that notional investment that lets us price $170K in the future, what we finance types call a discount rate, needs to be in inflation-plus terms, so we get the future value in today’s dollars. To get $170K in today’s dollars from $115K now requires not 5%, but 5% over inflation. (Present value of the various annuities assuming Inflation plus 5% are in the left most column of the table.)

Inflation plus 5% is not a realistic expectation for a low-risk investment. In fact, inflation plus 2% (a little better than what TIPS are running at now) is a much more realistic assumption.  And at that rate (it’s the 4th column in the table) the annuities that start later are clearly worth more.

This is not an exhaustive analysis. Among other things, I’ve ignored the possibility of a 62 year-old not living to 70, but this hits the side of the barn. Barring special circumstances, a person is generally better off waiting to receive Social Security until as late as possible, 70 being ideal. This is the intuitive answer, and the one alluded to in the Times article, but isn’t it nice to see the argument made with numbers?

Alas, as intuitive as it is, the Times tells us that the majority of people actually choose the wrong answer, electing to receive benefits early. Why? It’s possible they are broke and need the money. But I think there is something else going on. This is a complicated topic that gets too little discussion. Without knowing for sure what the best choice is, people make what seems to be the more conservative choice, to get the money in hand now. Once again, a lack of understanding of personal finance costs real money.

32 Comments

  • By Kosmo @ The Casual Observer, July 20, 2009 @ 11:15 am

    Why do a lot of people choose age 62? I think it’s a desire to get something out of a system they’ve been paying into for their entire adult life. Nobody wants to die at 64 and “not get anything” out of the system. (Sure, there are survivor benefits, but the dead person doesn’t get any benefit from the system)

  • By JohnB, July 20, 2009 @ 11:39 am

    Another consideration is the very real possibility that benefits in the future will be means-tested. A person starting benefits at 62 will have received more cash than one starting at 66 until about age 77. If benefits become means-tested before then, waiting would be the wrong choice for those affected.

  • By gpr, July 20, 2009 @ 1:11 pm

    Do you think people at 62 have a factual basis for deciding their own mortality rates, or do they just use the overall statistics? In other words, when I’m 62, will I have a pretty solid idea that I’m likely to be on the losing end of the chart? Or will I know (thanks to my wife’s nagging) that I have a really good chance of hitting the other side of the curve?

    Will I know, but lie to myself?

  • By vga, July 20, 2009 @ 2:02 pm

    Some of my older relatives are grabbing their benefits ASAP because they don’t think that Social Security will be solvent much longer.

  • By Brandon, July 20, 2009 @ 3:37 pm

    Why choose when you can have it both ways?

    Since by definition, having the choice to wait means you do not need the money at all to survive, then you could do the following:

    1. File for benefits at age 62.
    2. Collect benefits into a savings account, potentially rolling it over into a CD once you have accrued enough money.

    If you die before 70 or do not have long left to live:
    3. Leave a nice little chunk of change to your heirs.

    Otherwise:
    3. File SSA Form 521.
    4. Cash out your savings/CDs and pay back the SSA, keeping the interest I might add.
    5. Refile for benefits at the higher rate.

    Actually, I do not even see a reason why you would not be able to do it even more often. Yearly seems excessive for the amount of paperwork involved, but filing at 62, 66, and 70 might make sense if you feel you will live long enough.

    Source of idea:
    http://www.marketwatch.com/story/wish-your-social-security-benefits-were-higher-there-is-a-way

  • By Dave C., July 20, 2009 @ 3:46 pm

    Great post Frank! I’m willing to bet that some of the reasons for people drawing SS before the optimal age is a combination of financial distress and a pessimistic outlook not only on the OASDI system but also their own health.

    I imagine some people want to get money out of the system while they still can, assuming that OASDI and they themselves have an uncertain longevity.

  • By Brandon, July 20, 2009 @ 4:19 pm

    As an aside, a spreadsheet I put together using a 3.03% average increase (this is the figure over the past 10 years), I got the break even point for going at 70 over 62 to be somewhere between 78-79, going at 66 over 62 to be a hair under 76, and going at 70 over 66 to be a hair over 80.

    If you made it to 100, you would have $626k if you retired at 62, $785k if you retired at 66, and a hair under $962k if you retired at 70.

  • By Mr.GoTo, July 20, 2009 @ 4:57 pm

    Too often the eager beavers who start at 62 or even at 66 completely ignore the effect on a younger, surviving spouse who must depend on the survivor’s benefit, perhaps for many years beyond the death of the original claimant. For that reason alone it can make sense to spend more retirement assets in the early years so as to delay claiming SS until age 70. That also helps if the benefits become means-tested.

  • By Dangerman, July 20, 2009 @ 10:25 pm

    These analyses (yours Frank, and the NYT) also didn’t look at taxation of Social Security benefits.

    My parents have a marginal tax rate of 65% in retirement, because withdrawals from thier Traditioanl IRA make SS taxable.

  • By Jim, July 21, 2009 @ 3:51 pm

    Dangerman, how could they get to 65% marginal rate? I don’t think the top rate in NYC is even that high adding federal, state & city.

  • By mwarden, July 21, 2009 @ 5:40 pm

    Frank,

    Suppose your mom has a jar of 4 cookies, and she tells you and 3 of your friends that you can either have 1 cookie each now or 3 cookies each in 1 hour from now. Even an idiot like me can see that if all of you wait 1 hour, your mom has promised you 5 cookies she doesn’t have. Perhaps she gives you all 1 cookie and splits the last into thirds. Or perhaps she realizes this will anger all of you and instead decides to honor as many promises as she can, giving one of the kids her three cookies, giving another his 1 cookie, and leaving the other hungry. Then at least she gets 1 vote for mother of the year.

    I’ll take my 1 cookie right now, thank you.

  • By Frank Curmudgeon, July 21, 2009 @ 6:33 pm

    Or Mom will bake more in a hour.

    I think that a 30 year-old acting on the assumption that SS will not be there for him when he is 70 is reasonable, although I would disagree. A 62 year-old, on the other hand, acting on the assumption it will be gone in eight years is irrational. If necessary the gov’t will just print more dollars to hand out to the old folks. They don’t call it the third rail of American politics just for fun.

  • By mwarden, July 22, 2009 @ 8:54 am

    Frank,

    Agree that it doesn’t make sense for someone who is 62 now. I was just pointing out that there are perhaps other considerations beyond just the numbers. The assumption that the government can just borrow more money is predicated on a lot of factors that may not be true 40 years from now, and if they’re borrowing from themselves, well… the least of my concerns is social security.

  • By Patrick, July 22, 2009 @ 12:23 pm

    I think you’ve miscalculated the value of “a pension starting at 70 when you’re 62″. It is NOT the same as the present value of “a pension starting at 70 when you’re 70″ because of the chance you won’t make it to 70.

  • By Frank Curmudgeon, July 22, 2009 @ 5:10 pm

    I thought of that, and even mentioned it in the post. (2nd to last paragraph.) Adding in the risk of not making it to 70 doesn’t change the answer, it just makes the calculation more complicated and the post was long enough. Also, the premise of the analysis was that the person expected to live past 70.

  • By racy, July 25, 2009 @ 7:13 am

    Not so fast. Check this:

    http://www.nysscpa.org/cpajournal/2006/606/essentials/p42.htm

  • By heidi, July 25, 2009 @ 7:24 pm

    i think they should not give away ss to the extremely wealthy who can more than afford a lifestyle that some of us only dream of. sure, WE ALL pay into it…..but possibly this world could start taking care of those less fortunate. there should definitely be a lower cap on what the extremely wealthy should be able to receive…..ATLEAST.
    this is outrageous that we have people out there actually living on ONLY $750.00 a mth for everything…..and then you have the rich receiving much more a mth for ss and still have much more back up money to dip into. i have to say….those of you that could get by w/o ss money(you are the first to get in line for it and demand your cut)…..maybe think of all the yrs you pd into it as “charity” that you gave to the less fortunate instead of “what you deserve”.

  • By racy, July 25, 2009 @ 9:16 pm

    “From each according to his ability, to each according to his need.” Karl Marx. The phrase summarizes the principles that, under a communist system, every person should contribute to society to the best of his ability and consume from society in proportion to his needs, regardless of how much he has contributed. The Marxists thought such an arrangement will be made possible by the abundance of goods and services that a developed communist society would produce.

    Well, it didn’t work out that way for the Soviet Union, Communist China nor North Korea.

    Getting rich usually has nothing to do with being fortunate. It’s mostly going to work every day, living below your means, investing and keeping at it for a long time.

    I’ve put into the SS system for 39 years

  • By Annie G, July 27, 2009 @ 2:41 pm

    Not to try to speak for someone else, but I think perhaps Heidi was thinking that SS should be more like an “insurance” rather than trying to advocate “socialism”.

    We are all pretty used to the idea of paying for insurance (like car and house or even term life) and possibly never collecting at some future date. It is certainly an option to shift SS that way so that only those who actually need the money in their elderly years would collect.

    Not sure how I’d feel about that, but then, I’ll likely never collect any SS anyway (considering my work history and my life expectancy).

  • By Lorrie, July 31, 2009 @ 3:32 pm

    Your calculations don’t take into account special circumstances that may make taking benefits now more financially attractive. Parents of MINOR children, for example, should know that they are eligible to receive added benefits that may disappear if they wait. Ie: my husband took his benefits at 65, and both our twelve year old daughter AND myself (even though I am only age 51) receive benefits until she turns 16, which amounts to $119,520 in benefits for our family which would have been lost by waiting to apply until he was 70 (and she 16). This certainly tilted the spreadsheet in favor of taking benefits now rather than waiting.

  • By Norm, August 14, 2009 @ 3:43 pm

    That is all well and good if you sit behind a desk all day. Come outside and work 260 days a year in all weather and then till me to work till Iam 70 years old. Thank You.

  • By Norm, August 14, 2009 @ 4:19 pm

    Just an addeneum to the last comment. Cemetery work, caring for loved ones for the last 30 years. About 45000 so far. I can’t wait for 62. Thank You Again.

  • By mountainman, January 29, 2010 @ 12:18 am

    62 or 70??? hmmmm……I’ll will go with 62, as I have other financial resources (govt defined benefits pension, employer sponsored 457 plan, etc)to pay most of my bills.. But that money I get when Im 62 will be paid to a younger man, one who still enjoys and IS ABLE to enjoy his favorite activities. BIG differnce between 62 and 70. Uncle Sam wants you to buy into the wait a bit scam. Plan ahead, take the money ASAP and enjoy it………dont go to the grave without getting it or just get it and then give it to the local ‘rest home’ while you drool upon your self!

  • By Gladi8or, February 8, 2010 @ 11:52 am

    Dunno what Uncle Sam wants, but *I* sure appreciate you voluntarily giving up about half of your benefit…forever. It leaves more for ME! Thanks!

    Here’s my plan: At 62, my wife will draw her SS with me getting the spousal benefit on her account. This will result in a $500/mo shortfall over what we would have if I started drawing then. We will make up the difference by drawing an extra $500/mo from our nestegg. The lost interest will be far less than the 6%/yr gain I’ll get in SS benefits by waiting.) At 70, we’ll stop my wife’s SS and start mine, with her as “spouse”. At that time my SS will be nearly TWICE what it would have been if I started it at 62…and will remain that way for my life, and hers as survivor. After those first 8 years, our draw from the nestegg will drop dramatically; leaving it pretty much as an emergency fund and a hedge against inflation.

  • By getagrip, February 24, 2010 @ 10:33 am

    A lot of blue collar folks I grew up with and knew in my old neighborhood grabbed their SS early, by the time most of them reached 62 they were often beat. As others have said, it’s a different thing being a desk jockey and working until you’re sixty five or seventy versus having to work out in the weather on your feet for eight hours, getting up and down ladders to run pipe or electrical lines, or haul things around the factory floor like you did back in your forties. Many of them have been limping along and feel like they’ve finally crossed the finish line. This often coincides with homes being paid for, kids off on their own, etc. So why not get it while the getting’s good? Now is real, later is maybe. Now it takes half an hour to get out of bed and another fifteen minutes for the pain to ease off their knees so I can limp into a job where they’re told to get their butt in gear, later means they’ve got three more years of this to look forward to. If you weren’t driven by necessity, which would you choose?

  • By Scotchman, March 6, 2010 @ 9:06 am

    First, as former GAOer, I audited the SSA Office of the Actuary’s trust fund projections and studied the history of SSA.

    I also interviewed the Father of SSA, Robert Myers. Who repeatedly has told the Congress to keep their hands off SSA. It was meant to be Old Age Survivors Insurance…not the SSI welfare program it is today, to take the burden off the states.

    Second, the law is set up and SSA is set up, as outside the budget, a separate corporation. It was known when it was created, there would be times of surplus and times of deficits in the trust funds…now we have surplus and invest in US Treasuries and collect interest. In 50 years, might have deficit and then we are to borrow from the Treasury and pay interests…overtime all averages out…and can never go broke… But SSI should be funded by states, not SSA.

  • By Bob, March 9, 2010 @ 10:36 pm

    This is the most helpful analysis of the question “when to start collecting” that I have seen. It’s amazing that the SSA website doesn’t have a calculator for people to feed in different circumstances and assumptions.

    These calculations are (apparently) based the assumption that someone who is 62 will live to be 81 (if they are a man). If you live longer than that, you are even better off waiting. In addition, if you are married, your wife will collect your social security after your death. her life expectancy at 62 years old is 84, so if she is 3 years younger than you, she would be expected to outlive you by 6 years. The present value of these additional 6 years is calculated simply be assuming that the 62 year old in this example (if he is married to a woman 3 years younger than he is) is unmarried but will live to 87, rather than just 81. The effect will be to make waiting even more rewarding.

  • By msmerlin, March 21, 2011 @ 1:02 pm

    I like Mountainman’s philosophy. I wanted my hus to wait, but he wanted to start at 66. So we did (two months ago). I like the idea of a bigger monthly benefit, but who knows if he will live to the 70-year mark. I also don’t trust the government; if the Republicans have their way, there will be no more SS for anyone. This article is interesting though; more interesting are the comments from readers afterwards!

  • By Lee Martinson, March 26, 2012 @ 12:43 pm

    As an retirement planning advisor I have a hard time with some people– getting them to understand that if a married couple who are both healthy at age 66, they should seriously consider delaying the higher earner’s own benefit. When you add the tax benefits into the mix, it becomes an even better possibility.

    The one strategy mentioned above,about it paying it back and starting over is now very limited. You can only do it within 12 months or first claiming.

  • By Rich Uncle EL, July 25, 2013 @ 11:38 am

    I expect to not take social security, unless my nest egg gets cut drastically due to stock market fluctuations. I hope it will be around forever, just in case those that did not prepare for retirement will have other options to live with some income in the golden years.

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