When should you claim your Social Security Benefits?

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Dan Irvine  |  Principal
3Summit Investment Management, LLC
May 2017


Summary

  • Deferring your Social Security benefit until age 70 instead of claiming the benefit when you are first eligible at age 62 results in a monthly payment which is 76% higher.
  • The option to defer Social Security is the cheapest insurance policy available against living longer than expected.

The Numbers

When should you claim your Social Security benefits? This is a key decision when planning and preparing to retire. We are going to dissect the numbers behind the decision of when to claim Social Security benefits, which will provide you a quantitative framework from which to inform this key retirement decision. 

Before claiming your Social Security benefits, it is important you seek professional assistance when looking at your individual case since Social Security benefits are complicated and contain many factors to consider that will not be covered in this paper. There is no “right” answer to the question of when an individual should claim Social Security benefits. It is a personal decision and there are many variables to consider which are unique for each person or couple.

Individuals are eligible to claim Social Security benefits beginning at the age of 62, but may defer claiming benefits until the age of 70. Every year benefits are deferred, an individual’s monthly payment they receive until death increases by an average of 7.33%.  The main take away here is that if you wait until 70 to claim benefits, your monthly benefit will be 76% higher than if you had claimed at age 62.This is obviously a significant difference that can have a dramatic impact on the quality of your retirement and ability to maintain a lifestyle on par with what you enjoyed during your working years.

Of course, the decision is not that easy! To get something you must give something up.  By deferring benefits, you are foregoing a monthly cashflow you would have otherwise received from Social Security.  To really understand the decision of when to claim benefits, we need to calculate the age at which an individual would breakeven in total benefits collected if they chose to defer receiving their Social Security benefit until 70 versus claiming at 62.  The table below presents these calculations unadjusted for inflation because Social Security benefits are adjusted for inflation. The analysis below reflects the value of benefits in today’s dollar terms.

A Closer Look at the Breakeven Analysis

The “Increase in Benefit” column from the chart above shows the increase in the lifetime monthly benefit received by deferring for one year.  What is clear is that if you wait until 70 to claim then you will receive a check every month that is 76% higher than if you claimed at 62 years old ($1,320 versus $750 respectively).  The next logical question is at what age will the larger payments help me recoup the benefits I did not receive between the age of 62 and 70.  Will I be alive to see the breakeven day!?

The final column of the chart shows the age the claimant would be to breakeven in total benefits received had he/she began receiving benefits at age 62.  To receive the maximum benefit by waiting until 70 years of age to claim, you would have to live until the age of 81 years old to breakeven.  The average life expectancy is just under 80 years old in the United States. Individuals should take their own health and family history into account before making the final claim decision. 

There is a 50/50 chance at least one spouse will live to 90, so do not make the mistake of underestimating your potential lifespan.  If you live to 90 and claimed Social Security benefits at 70 you would receive 50% more in total benefits than someone who claimed at 62.  A person who claimed at 62 would receive $252,000 in total benefits by age 90 versus $380,160 for someone who had waited to claim until age 70. 

A Near Risk-less, Zero Fee, Inflation Adjusted Annuity

William Bernstein, an investor and author, once compared the deferral option of Social Security to an annuity.  Annuities in the real world are fraught with issues and not my favorite, however, the Social Security benefit deferral option really is like a near risk-less, zero fee, inflation adjusted annuity guaranteed by the United States Federal Government.  Sounds great, right?  Well it is.  You should always plan to live longer than you think you will because running out of money at the end of life is not a desirable outcome. 

By deferring Social Security to age 70, you can “buy” an annuity by paying for retirement out of your retirement savings until you begin receiving social security at age 70.  The check you receive will be much larger when you begin collecting Social Security, and it is inflation adjusted!  Costs can skyrocket towards the end of life, so deferring Social Security is a high-quality insurance policy which may help cover the higher costs of care. 

We have simplified the breakeven analysis thus far by assuming claim benefits are used immediately for retirement instead of being invested.  To demonstrate how great of a deal the deferral “annuity” is, we will use the same numbers as the breakeven example above, which is based on a $1,000 retirement benefit and assumes the claimant lives until 90 years old.  

Example: Claiming early and invest the benefit

An investor decides to claim her Social Security benefits at age 62 and receives $750 a month for the rest of her life, instead of deferring the benefit to 70, at which time she would have received $1,320 a month for the rest of her life.  This investor decides to claim the benefit at the earliest possible time thinking she can invest the entire benefit and in turn generate higher total benefits than she would have received had she deferred until age 70.

To just match the $1,320 a month benefit she would receive from Social Security beginning at age 70, she would need to invest 100% of the $750 a month in benefits she receives between age 62 and 70 and earn a 6.49% annual return with no significant drawdowns. 

Then she would need to earn 4.00% annually from ages 71 to 90.  These returns would have to be accomplished to just match the benefit she would receive had she waited to claim the benefits until 70. 

Inflation has averaged 2.35% a year and Social Security benefits adjust with inflation.  Given inflation she would have to really earn 8.84% annually from ages 62 to 70 and 6.35% a year from ages 71 to 90.  This investor will only be successful increasing her benefit from collecting early and investing if inflation stays constant, she has no significant investment losses and she does not live past 90 years old. 

This all amounts to a very low probability of success for the retired investor, especially compared to the near riskless and effortless option of claiming a government guaranteed lifetime benefit which carries little to no risk and adjusts for inflation!

Conclusion

There are many considerations that go into deciding when to claim your Social Security benefits. Additional considerations include:

  • Marital status
  • Amount of retirement savings
  • Life expectancy and general health
  • Needs of a surviving spouse

Our clients seek our advice regarding financial decisions, so it is only fair that if you made it this far that I should pick a side in this debate.  Because nobody can predict the future, I believe in picking actions based on the highest probability of positive outcomes.  For this reason, in my opinion it is best for most people to defer benefits until 70 years old. 

Maximizing your Social Security benefit makes sense because it is the most secure, guaranteed and inflation-adjusted source of cash flow available to individuals.  I believe you should have less fear about leaving money on the table should you not make it to break-even and insure against the possibility of a longer life with higher associated costs than you anticipated.