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Take Social Security Early or Late?

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One of my friends emailed me recently. She's been going through her financial plan in tremendous detail, dotting every "i" and crossing every "t". Though it is still far in the future, she's looking at her Social Security benefit.

She had a very simple question that, hopefully, we'll all face someday... should we elect to take Social Security early or late? She put it in much more direct terms, "Why would someone wait to collect Social Security?!?!"

I've read time and again that if you are healthy waiting to collect Social Security is the smart plan. Since I'm only 38, I haven't put much time into investigating it. However, knowing how smart she is, I knew that she must be onto something and it warranted a look.

Social Security's Benefit Changes

Currently, the age of Social Security eligibility is 62. If you decide to take payments then, you get less of a benefit than if you took it as the typical age of 66. Conversely, if you wait until 70 to take benefits, you'll get a larger benefit.

It appears that there's a sliding scale on how much of a "penalty" or "bonus" you receive of 7% per year. However, even this seems to change depending when you are born. For sake of this exercise, I'll presume that 7% number I read everywhere is accurate. If your predicted retirement age is 66, then waiting until 70 gives you a whopping 131% of your benefit for the rest of your life. Alternatively if you take it as early as possible you'll only get around 75% of your benefit.

Sounds like a no-brainer to wait, right? Who doesn't want 131% of their benefit instead of just 75% of their benefit every year for the rest of their life?

I prepared an email to my friend saying exactly that... and then I decided I'd back it up with a spreadsheet. However, when I created the spreadsheet, I found something very surprising... she may just have a point.

Conceptually, if she takes her benefit at age 62 and invests at 7%, it is essentially the same as if she took the benefit later. The catch is that she has to leave it there, year after year for it to be the same as if she chose to take the benefit later. She is very focused on investing and is the type who may very well make 8-9% with a well-diversified portfolio.

My friend has a another factor that makes taking the money more appealing. She's had health problems in the past, but hopefully they are behind her. If they come back, it's better for her to get as much of the money she can while alive, right? It does little good to collect Social Security at age 70 and die at age 72. It would have been much better if she collected money for 10 years, and worked it into her estate plan.

Sometimes what seems to be the best choice isn't necessarily the case.

Update: A friend pointed me to this great article on the topic where the notable quote was: "They're [the federal government is] hoping you're gonna wait. And they're hoping you're gonna die."

Last updated on May 11, 2014.

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16 Responses to “Take Social Security Early or Late?”

  1. kosmo says:

    Really depends on how long you live. If you’re terminally ill, it might make sense to take the money as soon as you can. Otherwise, it’s a bit of a crapshoot.

    Until recently, you could take the money at age 62 and then pay it back (without interest) and re-roll at a later age. Basically, insurance against dying during that span. They closed that loophole.

    • Lazy Man says:

      I think that sums up her plan to take it early.

      If you die early, you “win” (as in get the most money). If you live longer, it depends on how well you are able to invest the money and keep it invested, which is a crap shoot. The more I look at it, there really isn’t a reason to wait longer, except that I’ve read that with a couple the math changes due to survivor-ship rules.

  2. Steve says:

    The difference is, the 7% from social security is guaranteed (as much as anything is guaranteed). The 7-9% from the stock market is not. So if the return is roughly equivalent, then the clear choice seems to be delaying social security.

    Social security is a form of longevity insurance. It covers you if you live longer than you expected/average. It’s inflation adjusted too.

    I would not start taking SS early unless either I had reason to believe I was going to die earlier than average, I really needed the money now to pay living expenses, or my benefit was already at an amount that would cover my “floor” of necessary expenses.

    • Lazy Man says:


      I did say a similar thing to her, that the guaranteed 7% is significant, especially in this market where the guaranteed interest rate is closer to 1%… or even less.

      If she lives longer she’ll still be getting SS. It’s just that if she waits to 70 she’ll getting a lot more per month. If she collects and invests at 62, she’ll have built up a sizable nest-egg throwing off a good amount of income per month by the time she gets to 70. Is that extra income from the nest-egg enough to make up for the difference in the pay checks? It’s probably pretty close depending on how the investing goes.

  3. I guess it also depends on her other assets. If she has enough to live on now it might make waiting easier. Remember the average women lives until 83 I believe.

    • Lazy Man says:

      I would venture that she is in very good position with her other assets. It would be a major surprise if she needs the money.

      That said, I think the point she was making was that it really doesn’t matter how old she lives, because if she saves and invests the money from 62 to 70, that nest egg throws off enough cash indefinitely (presumably using the rule of 4% or a variation of it) to make up for the difference.

  4. Kathy says:

    I plan to start SS this fall when I turn 62. I know all about the increased benefits for each year you wait, but I firmly believe that some day the government will decide to increase the age for taking benefits, or means test it. Some how I just have to believe that they want everyone to wait, hoping we will die in the meantime. It will take several years if I wait to recoup the eight years of benefits I get by taking it early. The proverbial bird in the hand….so to speak.

  5. I went to a social security workshop last year. I learned:

    For people born in 1943 or later, each year you delay receiving social security your benefit increases by 8% per year up to age 70. After age 70, there is no additional monetary gain for waiting. Where else can you get a guaranteed 8% increase in earnings?
    The break-even age for collecting benefits at age 62 vs. full-retirement age is 78.
    They recommended:
    If you are in good health and have longevity in your family history, you will be better off in the long run to wait until full-retirement age to begin receiving benefits.

    Hope this helps.

    • Lazy Man says:

      I think the guaranteed 8% return is a great point. It’s much better than you’ll get in any CD nowadays. The flip side of it, if you get by hit a bus you stand to lose significantly.

      With the “break-even age”, it seems they are assuming that you would be spending the money at age 62 to live on and not investing it. There’s a big difference there over what I’m proposing. My friend would be using those 8 years of payments to build a nest egg… she doesn’t need it to live on. If it were 50,000 a year, that’s a 400,000 nest egg (even if it earned zero interest) which, using the Rule of 4%, would give you $16,000 a year indefinitely (again the Rule of 4% is not set in stone, but somewhat generally accepted).

  6. Robyn Weinbaum says:

    both my parents died at 60, my brother at 39. damn straight i’m going to collect ASAP. i can put the money into an IRA, i can invest, whatever. as savvy stated above, i’m not going to gamble that i’ll live to 78.
    my new husband is considering collecting when he hits 62, about 15 months from now, and work part-time, up to whatever the limitation is for benefit reduction. it will also eliminate his alimony obligation, currently 2/3 of his take home pay.

  7. Robyn Weinbaum says:

    one thing to consider: medical insurance. medicare does not kick in until you are 65. so look into the ACA, check the cost and then evaluate the total cost/benefit.

  8. Lazy Man, I love invoking idioms and expressions, no matter how cliche it gets. And one of my favorites is “a bird in hand is worth more than a whole bunch of them when you’re six feet under.” ;)

  9. Bobk says:

    There is one more issue to consider. If you take early retirement, any income that you make above $15,480 reduces your Social Security Income by $1 for every additional $2 you earn.

    *** wow, this turned into a bit a wander. Feel free to just print the 1st paragraph as that is what is germaine to the discussion.

    I’ve spent a lot of time looking into this as I have been diagnosed with an interstitial lung disease that, per the doctors, will shorten my life. As to how much time I have left, they gave me 10-20 years at the time of my diagnosis if I do not make a substantial life change (relocate to a dry climate), but whatever happens, it’s still too damn soon.

    So, here’s the dilemma (at least for me).
    1) I retire early in 2 years (at 62) and relocate to ABQ (my preferred location) in an effort to enjoy whatever time remains to me. Of course, that means I am on my own regarding health insurance. Also, since I have accumulated a bit of a nest egg, anything that I make in income from that is going to reduce my SSI benefits, possibly to nothing. So why do this????
    2) I continue to work while trying to find an employer that will hire me in ABQ. Not a strong option since I’ve been looking for about 4 years now. Under this option, I can still retire a bit earlier (65) than my full SSI age (66) as it appears that Medicare won’t be bankrupt by then, removing the issue about health insurance. I’d just have to live off the nest egg’s income for that first year.
    3) Just work till full retirement age, keeping my fingers crossed.

  10. Monty says:

    In my situation, assuming a 4% return on my investment, if I take social security at age 63, and therefore will need to take less from my investments, MY breakeven point is at age 97+.

  11. […] As a little primer, the eligibility age to start taking Social Security is age 62. If you opt to take it earlier, you'll get penalized. If you take it after age 66 you receive a bonus. It is typically around 7% in each direction around that key age 66 average. Opting to get around 72% of your benefit vs. waiting to get 128% of your benefit is a big deal, but so are those 8 years between taking Social Security at age 62 and taking it at age 70. This is why it is always worth considering whether it is better to take Social Security early or late. […]

  12. […] completely. While you might have to moderate your expectations in terms of when you can expect to start taking Social Security, and while you might need to prepare for cuts in benefits, the reality is that you will still […]

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