Choosing When to Start Receiving Social Security Retirement Benefits

The social security program allows you to begin receiving benefits the month after you reach age 62, or to wait until your full retirement age, or even later. The longer you wait, the fewer checks you’ll receive. But the checks will be bigger if your wait (up to age 70), so a delay will produce a greater total benefit if you live long enough. The decision about when to start taking your benefits is partly a gamble on how long you’re going to live and partly a matter of economic circumstances and personal preferences.

Choose Any Month

Once you qualify for retirement benefits, you can choose to start them any month. Your starting date doesn’t have to be at age 62 or at full retirement age. The amount of reduction for starting your benefit early (or increase for starting your benefit late) is calculated in small monthly increments, so that the benefit you’ll get starting in one particular month is not much different than the benefit you would get starting the month before or the month after. Apart from the operation of the earnings test, discussed next, there isn’t any point where you’ll see a sudden dramatic change by waiting one more month.

Earnings Test

The earnings test may reduce your benefit during the period before you reach full retirement age if you have significant earnings during that period. If you’re thinking about starting your retirement benefit before full retirement age while still working, you should take this factor into account. The reduction in benefits from the earnings test applies only to the years you have the earnings, and only until you reach full retirement age.

If your benefit is reduced as a result of the earnings test, the Social Security Administration will recalculate your benefit upward when you reach full retirement age. In other words, you get credit for the fact that you didn’t receive your full benefit, so these dollars are not necessarily lost forever.

Break-Even Point

The reduction you must accept when you take your benefit early is a permanent reduction. For example, if you take your retirement benefit 3 years early, the benefit will be 80% of the amount it otherwise would have been, not just for those three years, but for the rest of your life. You receive three additional years of benefits (that’s 36 more monthly payments than you would have received), but all your payments will be smaller, both before and after full retirement age. If you live long enough, the larger payment you’ll receive if you retire later will catch up with the smaller but more numerous payments you’ll receive if you retire earlier. The point when the total benefit you get is the same either way is the break-even point.

Let’s look at an example where your monthly benefit is $1,000, and you decide to take your benefits 3 years early. Your twin has the same monthly benefit but waits until full retirement age. You both have the same earnings history, and you both stop working at the same age, so the only difference in this example is the date you start to receive social security retirement benefits.

• After three years of benefits you’ve received 36 payments, but they were reduced 20% so the payments were $800 each, for a total of $28,800. So far, your twin has received nothing at all, so you’re $28,800 ahead of your twin.
• After one more year you have another $9,600 in benefits, but your twin received $12,000 in that time span. You’re still ahead of your twin, but you lost $2,400 of your advantage.
• Every year after that you lose another $2,400 of your advantage until you reach a break even point, 15 years after your benefits began (or 12 years after your full retirement age). At that point, you and your twin have received the same number of dollars.
• After that, your twin pulls ahead by $2,400 a year, from that point until the end of your life. For example, if you and your twin end up living 20 years after the date you start receiving benefits, your twin will end up receiving $12,000 more in total retirement benefits than you (five additional years times $2,400 per year).

As a result, you might consider starting to receive social security retirement benefits now if you think you have less than 15 years to live, and lean more toward waiting if you think you have more than 15 years to live. There are other factors to consider, of course, and we’ll get to them shortly.

Effect of Waiting

Before we move on, let’s see how the situation would change in the above example if you wait another year and one-half to begin receiving benefits, so that you’re starting just 18 months before full retirement age instead of three years early. What happens if you and your twin (who starts to receive benefits at full retirement age) live to the same age as in the previous example?

• Your break-even point will be 18 months later. As a result, your twin will be pulling ahead of you for only 42 months, not 60 months as in the previous example.
• Your benefit adjustment is 10%, not 20%. That means your twin gains $100 per month on you, not $200 per month. The total shortfall at the time of your death is $4,200, far less than the $12,000 in the previous example.

What we learn from this example is that a delay in starting your benefit reduces the risk of having a large shortfall if you have the “bad” luck to live a long time after your benefits start. If you don’t have an immediate need for the money and think you may survive a long time, you should think twice before starting benefits early.

Time Value and Inflation Adjustments

We determined the break-even point and the shortfall above without taking into account the time value of money: dollars you receive today are worth more than dollars you receive later. We have the luxury of figuring the break-even point this way because social security benefits are adjusted for inflation. The benefits you receive 20 years from now will be paid in “smaller dollars,” but you’ll also receive more dollars due to the inflation adjustment. You might say the time value of money is greater than the inflation adjustment, because you should be able to invest money in a way that provides an investment return greater than the rate of inflation. You’re free to make that assumption and take it into account in your decisions, but we’re keeping things simple by assuming that the time value of money is the same as the inflation adjustments. Using that assumption, the simple calculation described above provides us with a true break-even point.

Finding the Break-Even Point

The break-even point for starting benefits early or late, as opposed to starting them when you reach your full retirement age, depends on when you decide to begin receiving benefits:

• If you begin receiving benefits more than three years before your full retirement age, the break-even point will be about 12 years (144 months) after you reach full retirement age.
• If you begin receiving benefits three years or less before your full retirement age, the break-even point will be 15 years (180 months) after you begin receiving benefits.
• If you delay receiving benefits for a period of time after your full retirement age, the break-even point depends on what year you reached age 62. See this page for details on the adjustment in your benefits if you think you may want to delay the start of your benefits even after reaching full retirement age.

Notice that the first rule above gives the number of months after full retirement age, and the second rule above gives the number of months after benefits begin. Both rules give the same result if your benefits start exactly three years before your full retirement age, because 15 years after the benefits begin is the same as 12 years after you reach full retirement age. As pointed out earlier, there is never a point where you see a sudden dramatic change by waiting one additional month.

Comparing Your Life Expectancy

Once you know the break-even point, it may be useful to know how that compares with your life expectancy. Many people underestimate their life expectancy in their later years. It may surprise you to learn that males who reach age 65 live another 16 years on average, and a woman at age 65 can expect to survive another 19 years. See this page for more about life expectancy, and a link to a table on Social Security Online.

What you’ll find is that if you rely solely on these tables, men have a small incentive to wait (their life expectancy is somewhat beyond the break-even point) and women have a larger incentive to wait (their life expectancy is quite a bit beyond the break-even point). You may want to adjust for factors indicating you’re likely to live longer or shorter than the average person your age.

Other Factors

So far we’ve been looking at the economic analysis as if your only concern is to maximize the total benefit you get from the system. This approach might make sense if you’re well fixed financially, with enough money to cover all your likely needs so that the only concern is how much will be left for your children. Many people have other concerns. They may not be able to bear the thought of working another three years, and find that the only way out of that is to start taking social security retirement benefits before reaching full retirement age. Or they may simply feel it’s important to have more money available now, when they’re young enough to enjoy it. These are valid considerations, and only you can decide how much they should affect your decision. Understanding the economics of the decision can help you make an informed choice, but the economics don’t have to control your life.