As more baby boomers move into their 60s, there is increased interest in Social Security retirement benefits. In particular, seniors must decide when to start. Currently, the full retirement age (FRA) for Social Security is 66. That age applies to people born from 1943 through 1954. FRA gradually increases for younger workers, reaching 67 for those born in 1960 or later. You can start as early as age 62, but your benefits will be reduced. Alternatively, you can start as late as 70, which will entitle you to a higher benefit. If you start at 62, you’d get 75% of your FRA benefit; waiting after FRA increases your benefit by 8% a year. (Starting younger than FRA also will generate a reduction in benefits for those with substantial earned income, followed by a makeup in later years.) Example 1: John Anderson is entitled to a Social Security benefit of $2,500 a month at age 66, his FRA. If he starts at age 62, with little or no earned income, John will receive $1,875 a month (75% of $2,500). As another option, John could wait as late as age 70 to start and receive $3,300 a month (132% of $2,500). This, waiting from 62 to 66 increases John’s benefit by 33.3%. Waiting still longer, from 66 to 70, increases his benefit by 32%. By the eyeball test, John will get a benefit increase of about 8% a year for waiting. That government-backed hike may sound extremely appealing, when bank accounts and money market funds pay next to nothing.
Running the numbers through a calculator, it turns out that the higher benefit is really a compound annual increase of just over 7%. That’s still appealing in these low-yield times. However, the percentage increase actually fluctuates as John moves through his 60s. The periodic increases are fixed, as a percentage of FRA, but the deferred benefit increases in size as John grows older. Example 2: At age 63, John would receive 80% of his FRA amount: $2,000 a month. That’s an increase of $125 a month, from his age 62 benefit of $1,875, so John’s boost for the year is about 6.7%. By starting at age 64, though, John would get $2,166 a month, 86⅔% of his FRA amount. That’s an 8.3% increase for waiting that year, from age 63 to 64. Crunching through the numbers, the annual percentage increase drops, rises again and drops again until reaching a 6.5% hike from age 69 to a start at age 70.
Measuring the trade-off
Another way to make a decision on when to start Social Security is to see how much you give up by waiting, and how long the make-up period will be. If John waits from 62 to 70, he will relinquish 8 years of benefits (96 months) at $1,875 a month, or $180,000. He’d then collect $3,300 a month, an extra $1,425, so he’d catch up in 127 months. By the time John reaches age 81, he’d be ahead in total dollars collected, and the gap would grow in each succeeding month. Example 3: For another perspective, consider Kate Bennett, who also has an FRA benefit of $2,500 a month. Kate continues to work, so starting before her FRA doesn’t make sense. As mentioned, Kate could get a Social Security benefit of $3,300 a month by waiting until age 70. However, Kate doesn’t need to wait that long. By age 69, Kate could start Social Security and receive $3,100 a month. In the first year, she’d collect $37,200 in benefits. By waiting until 70, she’d get an extra $200 a month, so it would take her 186 months ($37,200 divided by $200) to catch up: 15½ years. Kate wouldn’t be ahead in total benefits until she’s approaching age 86.
Revising your outlook
The bottom line is that the ideal time to start Social Security can be a moving target. Starting at 62 might be a good choice if you need the cash immediately, have health concerns, or just want to get something back for all the taxes you’ve paid while you’re young enough for active pursuits. If you decide not to start at 62, you might consider waiting until at least age 64 to start to get the sizable 63-64 bump in benefits. On the other hand, if you’re in relatively good condition, physically and financially, you might decide to defer after you reach FRA to get a larger Social Security benefit. Remember that you’re not locked in to an age 70 start if you can delay; you can start any time in between 66 and 70, if waiting is no longer practical. Keep in mind that these calculations are relatively simple as they ignore taxes on benefits, cost-of-living adjustments and any interim investment earnings. If you want to explore this topic further, our office can provide detailed projections for your specific circumstances.