Social Security Analyzed – Part 2 of 2

Running the Numbers for a Single Social Security Recipient

To accurately compare the financial benefits of waiting until age 70 to take benefits vs. starting to at age 62, we are going to assume that you will not spend any of your benefits from the time you start collecting until the time you reach age 70. In fact, we are going to assume that you will reinvest all the benefits you’ve received, until age 70. If we don’t make that assumption, it is extremely difficult to make an “apples to apples” comparison.

For our example, we have two single people with identical earnings records. One starts collecting at age 62 and invests all the benefits at 4%. The other one waits until age 70 to begin collecting.

The gold line on the chart on page 3 represents the accumulation over time for the 62-year-old, and the green line represents the accumulation over time for the one who waited until age 70 to begin taking benefits.

If you take benefits at 62, you receive 75% of what you would have received if you waited until age 66, and if you wait until age 70 you will receive 132% of what you would have received had you taken benefits at age 66. By waiting until age 70 you will see a 76% increase in your monthly benefit from what you would have received at age 62.

The math here may not be immediately obvious so, consider an example. If your PIA at 66 is $100, and you decide to begin benefits at age 62 you will get $75. If you wait until 70, you will get $132. The additional amount you would get for waiting is $57 ($132-$75 = $57). The percentage by which you will have increased your benefit is 76% ($57/$75).

The person who waits until age 70 to take Social Security and lives past age 81 will ultimately receive a lot more in benefits than the person who takes the benefit at age 62 (age 81 is roughly the break-even point). That assumes a 4% (after tax) rate of return. If you assume a lower rate of return, the break-even age would be even younger. Now, you might think that age 81 is a long time to wait to break-even, but let’s think about the issues of long-term financial goals and concerns in more detail.

If you don’t absolutely need your Social Security benefits to maintain a reasonable lifestyle, and you anticipate living past age 81 (or even if you only think you only have a reasonable chance of surviving until age 81), here is why you should consider waiting. You may think the conservative thing to do is to take it early because if you don’t survive to age 81 you will “win.” That is the way I used to think about it until I was enlightened.

Larry Kotlikoff, an economist at Boston University, and a guest on The Lange Money Hour, taught me a better way to think about it. “Don’t think like an actuary,” declares Larry, “think like an economist.” You have to think about what you should be afraid of and what you should not be afraid of for financial purposes. For financial purposes, you should not fear an early death. You will be dead, and therefore you will have no more financial problems. What you should be afraid of, though, is living a long time and not having enough income to meet your needs. The big problem you could face is not having enough money to comfortably sustain you over your extended lifetime.

What you are doing when you hold off on taking Social Security is ensuring a greater income into your old age. In our example, if you live to age 95, the difference, in terms of the total amount collected, would be $3,345,019 vs. $2,587,914. That’s more than $750,000 additional dollars in your own pocket. The key concept to understand is this: the longer you live, the bigger the difference in the amount you collect and the greater your financial security if you live a long time.

Let’s face it, if you begin taking benefits at age 62 and you don’t absolutely need them, and you die shortly thereafter…well y ou are dead. No more worries. “But wait,” you say, “what about my spouse who is still alive. I want to take care of him/her too.” Exactly. Remember, in the previous example we are only talking about an individual who is not married. As will be seen, marriage introduces a completely new set of concerns that make waiting longer to collect benefits even more lucrative.

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