The following is an excerpt from my book Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.
Even if you are married, the place to start when trying to figure out when to claim Social Security is with a solid understanding of the (less complicated) analysis for unmarried retirees.
And before we go any further, let’s make sure we’re on the same page about an important point: The decision of when to retire is separate from the decision of when to claim Social Security benefits. For example, depending on circumstances, you might find that it makes sense to retire at a given age, yet hold off on claiming Social Security until a later date — maybe even several years later.
The earlier you claim Social Security, the less you’ll receive per month. For example, the following table shows how retirement benefits are affected by the age at which you first claim them:
|Age when you claim retirement benefits||Amount of retirement benefit|
|5 years before FRA||70% of PIA|
|4 years before FRA||75% of PIA|
|3 years before FRA||80% of PIA|
|2 years before FRA||86.67% of PIA|
|1 year before FRA||93.33% of PIA|
|at FRA||100% of PIA|
|1 year after FRA||108% of PIA|
|2 years after FRA||116% of PIA|
|3 years after FRA||124% of PIA|
|4 years after FRA||132% of PIA|
Background: Your “primary insurance amount” (PIA) is the amount you would receive per month if you claimed retirement benefits at your “full retirement age” (FRA).
In other words, by waiting until age 70 rather than claiming as early as possible at age 62, you can increase your monthly benefit amount by roughly three-quarters. Of course, by waiting, you decrease the number of months in which you’ll be receiving a Social Security check.
So how can you tell if the trade-off is worth it? One way to compare two possible ages for claiming benefits is to compute the age to which you would have to live for one strategy to become superior to the other strategy. Another way to analyze the decision is to compare the payout you get from delaying Social Security to the level of income you can safely get from other retirement income sources.
Computing the Breakeven Point
EXAMPLE: Alex and Bob are both retired and unmarried. Both are age 62, both have a full retirement age of 66, and both have exactly the same earnings history. In fact, the only difference between the two is that Alex decides to claim his retirement benefit at age 62, while Bob decides to wait all the way until 70. Even though Alex claims benefits at age 62, he doesn’t need to spend the money right now, so he keeps it in his savings account, where it earns a return that precisely matches inflation.
By age 70, because he has been receiving benefits for eight years, Alex is far better off than Bob. However, starting at age 70, Bob starts to catch up (because he’s receiving a monthly benefit equal to 132% of his primary insurance amount, as compared to Alex who is receiving a monthly benefit equal to 75% of his primary insurance amount).
In the end, Bob’s cumulative benefit surpasses Alex’s cumulative benefit approximately half way through age 80. From age 80.5 onward, Bob’s lead over Alex continues to grow.
The takeaway: For an unmarried retiree, from a breakeven perspective, if you live past age 80.5, you will have been better off claiming benefits at age 70 instead of claiming as early as possible at age 62.
According to the Social Security Administration, the average total life expectancy for a 62-year-old female is 84.7. For a male, it’s 81.8. In other words, from a breakeven perspective, most unmarried retirees will be best served by waiting to take their retirement benefit.
Comparing Social Security to Other Income Options
When you delay Social Security, you give up a certain amount of money right now (i.e., this month’s or this year’s benefits) in exchange for a stream of payments that will increase with inflation for the rest of your life.
Take, for example, somebody with a full retirement age of 66. If her benefit at full retirement age would be $1,000 per month, her benefit at age 62 would be $750 per month, and at age 63 it would be $800 per month.
Therefore, waiting from age 62 to age 63 is the equivalent of paying $9,000 (that is, $750 forgone per month, for 12 months) in exchange for a source of income that pays $600 per year (that is, a $50 increase in monthly retirement benefit, times 12 months per year), adjusted for inflation, for the rest of her life.
Dividing $600 by $9,000 shows us that delaying Social Security retirement benefits from age 62 to 63 provides a 6.67% payout. Let’s see how that compares to other sources of retirement income.
Inflation-adjusted single premium immediate lifetime annuities are essentially pensions that you can purchase from an insurance company. With such an annuity, you pay the insurance company an initial lump-sum (the premium for the policy), and they promise to pay you a certain amount of income, adjusted for inflation, for the rest of your life. In other words, such annuities are a source of income very similar to Social Security.
As of this writing, according to the quote system on mutual fund company Vanguard’s website (which allows you to compare quotes from multiple insurance companies), the highest payout available to a 63-year-old female on such an annuity is 4.34%. For a male, the highest available payout would be 4.72%. As you can see, both of these figures fall well short of the 6.67% payout that comes from delaying Social Security from 62 to 63.
Alternatively, we can compare the payout from delaying Social Security to the income that you can safely draw from a typical portfolio of stocks and bonds. Several studies (most famously, this one) have shown that, historically in the U.S., retirees trying to fund a 30-year retirement run a significant risk of running out of money when they use inflation-adjusted withdrawal rates greater than 4%. And it’s worth noting that even a 4% withdrawal rate isn’t a sure bet going forward, given that the studies show 4% to be mostly safe in the past, which is a far cry from completely safe in the future.
In other words, for each dollar of Social Security you give up now (by delaying benefits), you can expect to receive a greater level of income in the future than you could safely take from a dollar invested in a typical stock/bond portfolio.
A similar analysis can be performed for each year up to age 70, and the conclusion is the same: Delaying Social Security benefits can be an excellent way to increase the amount of income you can safely take from your portfolio.
EXAMPLE: Daniel is retired at 62 years old. His full retirement age is 66. He has $40,000 of annual expenses and a $600,000 portfolio. He is trying to decide between claiming benefits as early as possible at age 62 or spending down his portfolio while he holds off on claiming benefits until age 70.
Daniel’s primary insurance amount (the amount he’d receive per month if he claimed his retirement benefit at full retirement age) is $1,500, which means he would receive:
- $1,125 per month ($13,500 per year) if he claimed benefits at age 62, or
- $1,980 per month ($23,760 per year) if he claimed benefits at age 70.
If Daniel claims his retirement benefit at age 62, he’ll have to satisfy $26,500 of expenses every year from his portfolio (because Social Security will only be satisfying $13,500 out of $40,000). That is, he’ll be using a 4.4% withdrawal rate ($26,500 divided by his $600,000 portfolio) starting at age 62. That’s a higher withdrawal rate than most experts would recommend.
Alternatively, if Daniel delays Social Security until 70, he’ll have to satisfy annual expenses of $16,240 (that is, $40,000, minus $23,760 in Social Security benefits), plus an additional $23,760 for the eight years until he claims Social Security.
If Daniel allocates $190,080 (that is, $23,760 x 8) of his $600,000 portfolio to cash or something else very low-risk (in order to satisfy the additional expenses for those eight years), that leaves him with a typical stock/bond portfolio of $409,920. With a portfolio of $409,920, Daniel can satisfy his remaining $16,240 of annual expenses using a withdrawal rate of just under 4%.
In effect, Daniel is spending down his portfolio by $190,080 in order to purchase additional Social Security benefits in the amount of $10,260 per year, starting at age 70. By doing so, he’s reduced the withdrawal rate that he’ll need to use from his portfolio for the remainder of his life, thereby reducing the probability that he’ll run out of money. In addition, if Daniel’s portfolio performs very poorly and he does run out of money, he’ll be much better off in the wait-until-70 scenario than in the claim-at-62 scenario, because he’ll be left with $23,760 of Social Security per year rather than $13,500.
Reasons Not to Delay Social Security
Of course, there are circumstances in which it would not make sense for an unmarried investor to delay taking Social Security.
First and most obviously, if your finances are such that you absolutely need the income right now, then you have little choice in the matter.
Second, if you have reason to think that your life expectancy is well below average, it may be advantageous to claim benefits early. For example, if you have a medical condition such that you don’t expect to make it past age 64, it would obviously not make a great deal of sense to choose to wait until age 70 to claim benefits.
Third, the higher market interest rates are, the less attractive it is to delay Social Security. For example, if inflation-adjusted interest rates (such as those on inflation-protected Treasury bonds known as TIPS) were 2-3% higher than they are as of this writing, the payout from inflation-adjusted lifetime annuities might be higher than the payout from delaying Social Security.
- For unmarried retirees, from a breakeven perspective, you’ll be best served by waiting until age 70 to claim benefits if you expect to live past age 80.5. (And, for reference, the average total life expectancy for a 62-year-old female is 84.7. For a male, it’s 81.8.)
- For unmarried retirees, on a dollar-for-dollar basis, the lifetime income you gain from delaying Social Security is generally greater than the level of income you can safely get from other sources. As a result, delaying Social Security can be a great way to increase the amount you can safely spend per year. (Or, said differently, it can be a great way to reduce the likelihood that you will outlive your money.)
- The shorter your life expectancy and the greater the available yield on inflation-protected bonds, the less desirable it becomes to delay claiming Social Security benefits.