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When to Collect Social Security: 3 Reasons to Wait

You can start collecting Social Security retirement benefits at any age from 62 to 70. If you take them early, you’ll get less each month.  If you delay taking benefits, you’ll get more.  That can be a very smart move.

In last month’s post, we examined five situations where it may make sense to start collecting benefits before your Social Security Full Retirement Age (FRA), which is generally between 66 and 67, depending on the year you were born.

This month we explore three reasons to delay taking benefits, potentially waiting up to three or four years past your FRA, until age 70.  (There’s no benefit to waiting beyond 70.)

Reason # 1—It’s a Great Investment

Social Security is a lifetime annuity that’s adjusted each year for inflation.  (For simplicity’s sake, I’ll ignore the inflation adjustments here.)

For every year that you delay collecting Social Security benefits beyond your Full Retirement Age, the benefit increases by 8 percent of your Primary Insurance Amount, which is the monthly payment you’re entitled to at your FRA.

Although the 8 percent increases are not compounded, they still amount to very impressive returns, particularly now when interest rates are low and stock valuations high.

Example:  Jack’s full retirement age is 66.  His monthly Social Security benefit at 66 (his Primary Insurance Amount) would be $2,000, or $24,000 per year.  For each year that Jack waits beyond 66, his monthly benefit will increase by $160 ($2,000 X 8%), or $1,920 per year.

If Jack waits four years, until age 70, he’ll collect $640 more per month, or $7,680 more per year.  His yearly benefit at 70 will be $31,680, 32 percent more than the $24,000 he’d collect at 66.

Jack’s effective compounded annual increase in benefits over the four years amounts to a healthy 7.2 percent a year.  (For a person whose FRA is 67, the three-year wait until age 70 produces a 7.4 percent annualized increase.)

Reason #2—It’s a Hedge Against Outliving Your Money

The Social Security Administration calculates monthly benefits based on the average life expectancy for the population as a whole. 

However, individual life expectancies have been rising for a century and continue to increase.  According to the Society of Actuaries, based on current trends, 1 out of every 3 men, and 1 out of every 2 women, who are in their mid-50s today will live to be 90.

Moreover, a variety of factors other than family history, many of which we can control, influence how long we live, including social connections, lifestyle (e.g., exercise habits, smoking and drinking), educational and socioeconomic level, and attention to medical care.

In short, you might live much longer than the average.  Having a Social Security benefit in old age that’s 24 to 32 percent larger (because you waited to age 70), and having that larger benefit adjusted for inflation for as long as you live, is an excellent hedge against the risk of outliving your money.

Reason # 3—It’s Even More Important if You’re Married

If you’re married, the odds that at least one of you will live to a ripe old age increase even further. 

According to the Society of Actuaries Longevity Illustrator, for a nonsmoking, 65-year-old married couple in excellent health today, there is a 73 percent chance that one of them will live to age 90, and a 47 percent chance (nearly 50-50) that one of them will live to age 95.  (There’s even a 20 percent chance that one of them will live to be 100.)

By contrast, Social Security data show that the average man reaching 65 today will live to age 84.3, while the average woman of the same age will live to about 86.6.

One spouse in a marriage, then, has very good odds of living at least 5 to 10 years longer than the Social Security averages.

One of the most powerful arguments in favor of delaying benefits is that, for a married couple, the surviving spouse receives the higher of their own or their deceased spouse’s benefit. Thus, the higher-earning spouse is often better off delaying benefits until 70, because the increased benefit amount will be paid as long as either spouse is alive.

That’s particularly important, given that one of the two Social Security checks the couple had been receiving goes away at the death of the first spouse.

Delaying, in other words, protects your surviving spouse by providing him or her with the highest possible lifetime income.

The Bottom Line

In the end, whether to collect Social Security benefits early, at Full Retirement Age, or later, depends on many factors, and the best answer from a lifetime financial perspective should be evaluated based on each person’s unique personal and financial circumstances.

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