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Another common question I get is: “When should I start collecting my Social Security retirement benefits?” Like the other questions we have dealt with in previous articles, this is a simple question with a complex answer.
I have been told by people (who have significant analytical skills) that they answered this question by creating a spreadsheet to compare taking benefits early (usually age 62) or deferring until normal retirement age (usually 67) or the maximum benefit age (70).
Wes Shannon
These analysts have shown me that if they take the early benefit and invest it at a reasonable rate of return they would have to live to quite an advanced age (well into their 80s, typically) before deferring would be more advantageous. I have rarely seen any mathematical problems or errors with those calculations. Those folks who have shown me their spreadsheets are very proud of them (rightfully so) and are highly confident in the Social Security decisions they’ve made based upon the calculations.
But there’s more to this decision than numbers. While the purely mathematical evaluation is not wrong, it is not necessarily a sound method of determining when Social Security retirement benefits should start. Like most financial questions, each person’s individual situation must be considered … outside of the spreadsheet
Let’s start with the basics of what Social Security retirement benefits (SSRB) options are available. If you were born in or after 1960, your “normal retirement” date is age 67; if you were born before 1960, “normal retirement age” is age 66 and some months (the SS administration has a formula to calculate exactly how many months). When starting SSRB at the “normal retirement age” benefits are calculated based upon a 35-year income average, and there are no income limits or restrictions for working when collecting normal age SSRB.
The earliest a person can begin SSRB is age 62. To determine the payout at that age, the “normal retirement age” figure is discounted using a complicated per-month formula. So, at age 62, the distribution amount could be up to 30% less than the full SSRB at “normal retirement age.” Also, if you take SSRB early but you continue to work, your benefit will be reduced by $1 for every $2 you make above $21,240 until you reach your “normal retirement age.” That reduction ends once you reach “normal retirement age,” but your benefits will still be discounted due to taking your SSRB early.
If you defer and start your SSRB after your “normal retirement age," your benefit will increase by 8% per year until you reach the maximum SSRB age of 70. Waiting to age 70 can mean a 27% increase in your lifetime SSRB.
Here’s an example using estimated figures: At age 67, a person may have a SSRB of $2,000/month for life. At age 62, the same person would get SSRB of just $1,420/month for life. At age 70, the SSRB would jump to $2,540/month for life.
The spreadsheets and calculators out there usually run a “break-even” or “lifetime payout” analysis to determine the optimal strategy for drawing social security. These are often one-size-fits-all analyses that don’t consider other, critically important non-math factors. There are countless “beyond the math” factors that play a role, which may include:
- Personal health — An unhealthy person may wish to start early
- Family longevity — Someone with many relatives who lived to advanced ages (beyond 90) might want to defer
- Working status — If one is enjoying their work and it is providing all that they need, deferring makes the most sense (What else in the financial world offers a guaranteed 8% return from the Federal Government?)
- Net Worth — What other assets does a person have invested and what kind of returns are they making on that money? Does it make more sense to draw on those investments or begin collecting SS?
- Liquidity — Is there enough income to support current lifestyle without taking Social Security?
Our firm uses the most current comprehensive financial planning software, which not only calculates which option will pay out the most over time but also estimates a person's ending estate value at their death. Even that is no guarantee. I have seen calculations where the “optimal” SSRB strategy can actually produce a lower estate balance (and vice versa) due to timing issues related to client spending and investment returns. I have even had cases where there wasn’t an optimal strategy, because the end results were largely the same with any choice!
As I said, this is a simple question without a simple answer; it varies from person to person. Like everything else in financial planning, I suggest seeking professional advice from a fee-only Certified Financial Planner and looking beyond the spreadsheets and calculators before making a decision.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors.