When Should I Take Social Security?

“When should I take Social Security?” is the first question everyone faces when contemplating retirement. More than 50% of all men and women start taking benefits at 62. By age 66, well over 90% of all men and women are taking benefits according to the Center for Retirement Research at Boston College.

The Break Even Approach

The popular financial press typically asks readers to consider the “break even” age — that age when the total benefits of taking Social Security early outpaces the credits we receive by delaying. This approach is similar to the way one considers buying down a home loan with “points” and asking ourselves: “How long do I expect to live in this home?”

Enrolling for benefits early means a lower Social Security payment; collecting at age 70 provides a payment that is 8% a year higher for each year delayed after the full retirement age. In other words, as the popular recommendation goes, one should calculate how long one needs to live in order to “break even,” that is, live long enough to collect enough from the SSA that the total amount collected is at least equal to the amount you forgo in electing to take reduced benefits. If you die before that date, the SSA wins; if you die after that date, you win.

The “option set” this presents to people assumes a kind of “gamble” situation (“break even”) rather than an economic situation or even a life-cycle planning situation.

Lifetime Living Standard and Insurance Against Longevity

If what’s at stake here is bragging rights on a bet, this “break even” methodology might be a reasonable method to consider. But what’s at stake is lifetime living standard and the insurance against longevity that Social Security provides. The risk of one’s house burning down has a particular actuarial possibility. The risk of a serious health problem likewise might be presented as a percentage as in a “1-in-a-1000″ possibility. But few of us would be willing to drop our insurance because of the probability that we won’t need it. The reason is because we are risk averse: we care much more about protecting ourselves from bad things than we do about the possibility of positive outcomes.

The fact that on average, a 50-year old male will die at 78 may be a fact, but the possibility of that same male living to age 100 is a reasonable possibility. We protect ourselves from what might possibly happen, not from what, on average, will probably happen. And living until age 95 or 100 is a real possibility for most people — especially for those that reach age 65 at which point the average age of life rises to 83 for men and 85 for women. But again, it’s possibilities, not averages that we must plan for.

Delaying Social Security Is Nearly Everyone’s Best Option

I’d like to contribute to our recent discussion (referring to Should You Delay Your Social Security Benefits article) by presenting a different view — a case that argues that delaying Social Security until age 70 is nearly everyone’s best option. The exception is those with a terminal illness or those with no other source of income.

Let’s consider Jack and Jill Delay. They are both 60 years old and their children have left the nest. They each make $125K a year, and their employer matches their 5% contribution to the 401(k). This $6,250 (plus employer match) will continue until they quit working at the end of their 64th year of age. They just refinanced their home, and they have 12 years left to pay and a $100K loan balance. So their monthly payment is $925 and their annual taxes are $3K and their homeowner’s insurance is $1K. They each have accumulated $350K in their 401(k) and, as a couple, they have $200K of regular assets in a mutual fund. Let’s assume all of their assets — retirement and regular — earn a nominal rate of 6%, i.e., just 3% over the assumed 3% rate of inflation.

And to make things more complicated, I’ve intentionally included a ten-year gap in Jill’s earnings history (let’s pretend she took a hiatus to raise children or study jazz piano). This means that she has less benefit than her husband. To be precise, she will receive $21,944 at age 65 and Jack will receive an annual benefit of $22,088. If they delay until age 70, they will receive $31,035 and $31,238 respectively. But that’s not all. Because Jack will apply for benefits and then immediately suspend, Jill will receive a spousal benefit of $11,833 beginning at age 66, her age of full eligibility and this will continue through age 69 when her $31,035 benefit kicks in. Jack is not penalized for this strategic maneuver.

When should they take Social Security?

Before answering that question, let me call attention to some of the language I’ve used in the introduction above. As a professor of writing and rhetoric, I study language use in what we call discourse communities. I want us to think about this financial situation, not as a gamble with talk about “breaking even” but rather as an economic situation, as a life-cycle decision, as an economic puzzle where there is an optimal solution measured by the highest and smoothest lifetime living standard. However it’s not just a preference for one kind of language over another that I’m expressing. My argument hinges on the fact that we measure the advantage of one financial choice over another by comparing the lifetime living standard that is the result, not by the isolated outcome on just one particular piece of the puzzle.

How Taxes and Income Are Calculated

When Jack and Jill are both 64, they pay $60,646 in Fed taxes, $16,200 in State taxes, and $8,776 each in FICA taxes. That’s $94,398 total taxes at age 64. At age 65, they pay $14,963 in Fed, $2,900 in New York state taxes, no FICA, for a total of $17,863.

That’s in today’s dollars. The calculation is bases on current NY state tax tables and Fed tax guide. That difference is related to the income of $263,015 at age 64 ($125,000 labor income each and $13,015 regular asset income from interest on their taxable savings). At age 65, their income is $102,416 (Social Security $22,088 and $21,944; 401(k) withdrawal of $21,808 each, and $14,768 of regular asset interest income. That’s a total income $102,416.

So that’s how the income and taxes work out in those two years — ages 64 and 65 — according to current federal and state tax schedules as reported in today’s dollars.

So, for example, when Jack and Jill retire at 65 and take Social Security, they will see their total tax burden (FICA, Federal, and New York State) drop from $94,398 to $17,863 (81% drop) in the first year (see sidebar). If they delay Social Security to age 70, this tax burden drops 92 percent in the first year. But this fact alone is just one piece of the entire economic puzzle, and it should not itself be the reason that they should delay.

In the same manner, a break even point should not itself be the reason for delay or not delay. The reason to delay or not to delay has to be evaluated by the bottom line of highest lifetime living standard. My argument is that anything other than this bottom line is short-sighted economics.

Lifetime Living Standard

By living standard, I mean the discretionary spending this couple has to live on after they have paid their taxes (FICA, Federal, and State), housing (mortgage payment, taxes, and insurance), Medicare Part B premiums (beginning at age 65 and rising each year at the recent historical rate of 4.5%), and contributions to retirement (which end after their 64th year of age). What’s left over is what is meant in this case by living standard.

Taxes, housing, and Medicare premiums are not static amounts. Indeed, they are mutually related and interact with each other and inflation in complex ways. For example, Social Security can be subject to taxes, which would impact lifetime living standard. When taxes are low — as in the 5-year period when Social Security is being delayed — this provides more resources to live on. And housing — the mortgage payment piece of the puzzle — is paid off in today’s dollars because of the fixed mortgage rate so that the cost of housing effectively declines each year until payoff. Taxes related to mortgage interest are thus affected as well.

If Jack and Jill take their Social Security at age 65, they will experience an annual lifetime living standard of $82,353. If they delay Social Security until age 70, they will experience an annual lifetime living standard of $88,196. That’s a 7% improvement — $5,843 more in today’s dollars each and every year of their life beginning at their current age of 60!

Results From ESPlanner

I’ve used ESPlanner software (www.esplanner.com) to calculate these results. This analysis is not black-box smoke and mirrors or an estimate. This analysis is based on current Federal and New York tax tables and accurate Social Security projections based on the particular earnings history I used for this couple. Anyone using the program could replicate these numbers and the results are all presented in tabular spreadsheet format so they can be examined. Anyone doing the math without the aid of this program — which of course would be very difficult to do — would get the same results.

So now for the results, which will be presented in today’s dollars so that inflation is accounted for and numbers can be easily understood.

Let’s look at a few of the tables from the ESPlanner report. This table shows the annual taxes dropping at age 65 and then going up again when Social Security clicks in at age 70.

Age Total Income Total Spending Taxes Saving Regular Assets
60 $256,000 $115,473 $85,383 $55,144 $261,144
61 $257,606 $115,159 $88,007 $54,441 $315,585
62 $259,192 $114,854 $90,583 $53,755 $369,339
63 $260,757 $114,558 $92,191 $54,008 $423,347
64 $262,330 $114,271 $93,806 $54,253 $477,601
65 $57,528 $108,068 $7,391 $(57,931) $419,669
66 $67,673 $107,853 $8,688 $(48,868) $370,801
67 $66,250 $104,556 $8,133 $(46,439) $324,362
68 $64,897 $104,331 $7,606 $(47,040) $277,322
69 $63,527 $104,119 $7,085 $(47,677) $229,645
70 $112,579 $104,332 $17,655 $(9,409) $220,237
71 $112,305 $104,288 $17,481 $(9,464) $210,773
72 $112,029 $96,701 $17,305 $(1,977) $208,796
73 $111,971 $96,908 $17,268 $(2,205) $206,591

This next chart shows the declining housing expenses due to the effect of inflation, and it also shows the cost of Medicare Part B. Notice that after the home is paid for at age 72, what remains is taxes and insurance that rises with inflation (i.e., is steady in the table below because we are looking at today’s dollars, or dollars adjusted for inflation).

Note also the Living Standard column. This is our “bottom line” and ESPlanner is solving the problem so that although housing costs are declining because of inflation and Medicare B premiums are rising, and inflation marches on — yet, the living standard (presented in today’s dollars) is steady at $88,196. When comparing options in this program (e.g., when to take Social Security, whether to use a Roth IRA or a traditional IRA, what might be the impact of moving to a different state, refinancing a home, etc.), it’s the resultant sustainable, lifetime living standard that provides the bottom line answer for the purpose of comparing options.

Age Living Standard Housing Expenditures Jack’s Retirement Account Contributions Jill’s Retirement Account Contributions Medicare Part B Premiums Total Spending
60 $88,196 $14,777 $6,250 $6,250 $0 $115,473
61 $88,196 $14,463 $6,250 $6,250 $0 $115,159
62 $88,196 $14,158 $6,250 $6,250 $0 $114,854
63 $88,196 $13,862 $6,250 $6,250 $0 $114,558
64 $88,196 $13,575 $6,250 $6,250 $0 $114,271
65 $88,196 $13,296 $0 $0 $6,576 $108,068
66 $88,196 $13,025 $0 $0 $6,632 $107,853
67 $88,196 $12,762 $0 $0 $3,598 $104,556
68 $88,196 $12,507 $0 $0 $3,628 $104,331
69 $88,196 $12,259 $0 $0 $3,664 $104,119
70 $88,196 $12,019 $0 $0 $4,117 $104,332
71 $88,196 $11,785 $0 $0 $4,307 $104,288
72 $88,196 $4,000 $0 $0 $4,505 $96,701
73 $88,196 $4,000 $0 $0 $4,712 $96,908
74 $88,196 $4,000 $0 $0 $4,929 $97,125
75 $88,196 $4,000 $0 $0 $5,155 $97,351

Finally, we can look at the total income of this household. Again, income is not our final target in retirement planning despite the planning industry’s focus on “replacement income” and “income needed in retirement.” Our bottom line is living standard. Thus, if our household income can drop from $262,331 at age 64 to $57,525 at age 65 and then back up again to $112,578 at age 70, so what! The bottom line is not income, it’s available discretionary spending — or living standard. In this case, the living standard remains steady or smooth at $88,196 from age 60 through age 100, which is 7% higher each year than it would be if they took Social Security at age 65.

Age Jack’s Non-Asset Income Jill’s Non-Asset Income Jack’s Retirement Account Withdrawals & Annuities Jill Retirement Account Withdrawals & Annuities Regular Asset Income Total Income
60 $125,000 $125,000 $0 $0 $6,000 $256,000
61 $125,000 $125,000 $0 $0 $7,606 $257,606
62 $125,000 $125,000 $0 $0 $9,192 $259,192
63 $125,000 $125,000 $0 $0 $10,757 $260,757
64 $125,000 $125,000 $0 $0 $12,331 $262,331
65 $0 $0 $21,808 $21,808 $13,911 $57,527
66 $0 $11,833 $21,808 $21,808 $12,223 $67,672
67 $0 $11,833 $21,808 $21,808 $10,800 $66,249
68 $0 $11,833 $21,808 $21,808 $9,447 $64,896
69 $0 $11,833 $21,808 $21,808 $8,077 $63,526
70 $31,238 $31,035 $21,808 $21,808 $6,689 $112,578
71 $31,238 $31,035 $21,808 $21,808 $6,415 $112,304
72 $31,238 $31,035 $21,808 $21,808 $6,139 $112,028
73 $31,238 $31,035 $21,808 $21,808 $6,081 $111,970

The approach presented in the pages above (with the help of ESPlanner) is called the economic approach to planning because it does not treat each related problems piecemeal but rather as a systematic whole puzzle with mutually related parts. Taxes, asset interest income, inflation, Social Security, 401(k) withdrawals, spousal benefits, Medicare Part B premiums, and a fixed mortgage rate are some of the interrelated factors considered in this case. In a different case we might also factor in long-term care, a reverse mortgage, annuitizing assets, etc. Every case is different. But the main point here is that we cannot just look at a single factor like “break even point” to determine if we should delay Social Security. This decision is part of a complex economic puzzle, and the bottom line is not income, taxes, break even point, or housing cost, but rather annual living standard from the current age forward.

Planning to take Social Security at age 70 instead of age 65 allows Jack and Jill to experience a higher living standard from the date they make that plan forward. If Jack and Jill, currently 60 years old, both tragically die at age 68 — before they’ve taken even one dollar of their Social Security — they will still have lived 8 years at a 7% higher living standard than they would have lived had they planned and then taken their Social Security at age 65. Granted, the SSA might boast that they won the actuarial wager, but Jack and Jill won’t be around to hear it.

About the Author

By , on Apr 28, 2009
author
Dan Royer is a professor and chair of the Department of Writing at Grand Valley State University in Grand Rapids, MI. He has been studying the discourse of financial planning which he became interested in after purchasing and using ESPlanner. After using the software for awhile, he ended up writing some documentation for the company and in the last year he has been involved with the building of their new website (for hire).

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Leave Your Comment (14 Comments)

  1. Alice says:

    I would think your overall health and that of your family should be computed in your analysis. If delaying your SS means you continue working, how much good are your doing your employer (and ultimately yourself) if you take that much more sick time at age 68 than you did at 64? How many more funerals of family members, friends, etc, might you attend? If your spouse is much older, will you require many more days to see to his or her needs?

  2. Dan Toloso says:

    I read about filing for SS benefits, registering my minor son, and then suspending my benefits so it will increase between now (66 years old) and 70 years old, but my son would start getting benefits. I tried that and was turned down by SS office. They used the word “entitled” which I think they misunderstand the meaning of. They said because I wasn’t entitle to SS he could not receive benefits, I read it as “Entiltled” meaning authorized to receive, they read it as “Entitled” you are receiving benefits.
    They couldn’t find the official reference to why I couldn’t claim benefits for him while deferring mine. You said in this articel that “Because Jack will apply for benefits and then immediately suspend, Jill will receive a spousal benefit of $11,833 beginning at age 66, her age of full eligibility and this will continue through age 69 when her $31,035 benefit kicks in. Jack is not penalized for this strategic maneuver.

    Isn’t this the same thing except my son is a minor and she is Jack’s spouse. Minors can collect through their 18th year. They clearly said that if i was not receiving my benefits (Entitled) then he could not collect. What is the real story here, should I have been denyed.

    Thanks
    Dan

  3. Marcie says:

    Went to SS Office prior to my Birthday 4/10/11 to get info on Spousal Benefits, as my younger sister told me she was receiving in Tennessee. When there I was told Yes I could get the Spousal & No it would not affect my later getting my own SS Retirement.

    Today I went back to go ahead with the plan. Guess What! I was told by another “expert agent” that I could not get the Spousal because my Retirement amount currently is higher than my husband’s already. So, looks like we are stuck because he would have to have been the one filing for Spousal. And, that I would have to actually draw Retirement SS benefit to get any amount at this date…at the younger age (of course) thereby getting the lower dollar amount.

    The “expert” told me that additionally my sister had to be very careful not to exceed $14K salary or she would reduce her benefit. I know my sister works in the nursing field and does make fairly good money, so she needs that info and I am concerned that she was not advised properly….And, she told me herself that she could get the benefit & continue work until she was ready to Retire without reducing her Retirement Amount. I am concerned that she was not correctly informed that by taking the Spousal Benefit the possible affect it would or could have on her
    just the way I have been told two different stories. BAD, JUST PLAIN BAD! ALL THE WAY AROUND!!
    So, Pinyo, now what? :^(

  4. Pinyo says:

    @Marcie – You can also ask the Social Security Administration about this when you visit them. Based on what I know, you can file for spousal benefits now, then switch to your own benefits later.

  5. Marcie says:

    My husband is 67, retired and receives $1053 SS monthly. I am 64 this week, receiving a pension of $1314 monthly. We are having a difficult time making ends meet. If I take a Spousal Benefit of $362 monthly now, will it prevent me from getting my projected SS benefit of $1333 at 66 (or more at 70)? Am I then required to only get a Spousal Benefit? Or, do I get my SS and the Spousal together? I am so very confused over all of this. Along with retirement comes age…and, confusion!! Too much! Thanks, Marcie

  6. Jasuba says:

    http://ssincomeplanner.com – Social Security Income Planner web-site allows Cahsflow modeling of Social Security claiming strategies. Thx

  7. Dan says:

    If you run your numbers in http://basic.esplanner.com/ (Free) or the download program you buy, you’ll see the impact of SS on your taxes. Certainly these things interact. Each situation is different, which is why you have to run each case. But it doesn’t take long. What you want is a smooth living standard through the ups and downs of taxes, etc. This calculator figures out that smooth living standard level for you. –Dan

  8. vincent says:

    I get 47,616 pension per year. I expect to get 2000 per month from social security. My wife will get 1000 per month from social security. Is there a way to reduce my taxes so that i can pay less tax on my social security?

  9. Dan says:

    Hi Ron:

    Yes, I understand your point there. To answer the question you pose, the reason you would maximize through delay of SS is so that you can have a higher living standard NOW, at age 55 or 60 or 65 etc. As I say in the article above, if you die at age 68 and never touch a dime of SS, then you’ve still had a higher living standard–more money to spend each year–than you would have had if you had taken the SS at 62. Granted, you will have less IRA to leave to your heirs.

    If you are 62 and think SS is going to be cut, then calculate the plan with that cut in mind. I guess you are saying that SS would never cut your existing benefit once they start paying it at age 62? Right now they raise it for inflation each year. Perhaps they will stop that. Indeed, the future is uncertain–especially where something like this is concerned.

    I agree that maximizing your IRA is very important. But if you want to maximize its use to you, then delay SS to age 70! For each year that SS pays out at age 70–the higher premium–the more you are going to stretch those IRA dollars.

    SS is a kind of longevity insurance. If we all knew we were going to die at a certain date, then it would be easy to calculate the right year to take SS. But we don’t, just like we don’t know if our house is going to burn down–thus we pay for hazard insurance. My point is that you get WAY MORE longevity insurance for your dollar if you delay. Uncle Sam gives a really, really good deal for waiting. If you think he’s going to get out of the SS business, or cut the premiums or whatever, then I guess take it now, but you are likewise assuming that he’s not going to cut your premium once you get it going?

    I guess that’s another way to look at it.

    Best,

    Dan

  10. Ron says:

    My IRA is my account which has cash that I can control and I know will be there for me.

    My SS is an account in which I have no real control. I don’t even know how much I can depend upon SS because the government could suddenly say were going to drop your benefits by 30% and I would be powerless and have no choice in the matter.

    Why should anybody plan to maximize their SS benefits when there is no control or guarantee that they’ll be there for you? Having a good portion of my monthly income depend upon the political whims of big brother and his political lobby scares me.

    On the other hand my IRA, if invested properly with consideration to the risks, will be guaranteed to be there for me. It seems to me that one should take their SS at 62 and avoid dipping into the IRA and other savings if possible. Sure, SS payout increases 8% per year you delay ( and there is not guarantee on any increase in the stock market) but what good is that if I cannot depend upon the foundation of SS?

    I say maximize your personal savings and IRAs rather than SS.

  11. PVH says:

    I think one major assumption that you’ve built in is driving your results — ESP let’s you set the ‘worst (best?) case scenario’ in terms of longevity — it looks like you’ve set it at 100 years. If we are planning to live to 100 (or even 85+) then delaying SS benefits to age 70 is the obvious choice.

  12. Hi Dan.

    Thanks for taking the time to run the numbers and reply. Very interesting conclusion.

    And yeah, what I was getting at is that, for some people, maximizing standard of living isn’t necessarily the end goal. (At least, after reaching a certain level of standard of living, that is.) Instead, after meeting that necessary level, the goal might in fact be to maximize total net worth (or more specifically, total expected net worth).

    Btw, I really like your explanation that “we protect ourselves from what might possibly happen, not from what, on average, will probably happen.”

  13. Dan says:

    O-Investor:

    Yes, that’s a good question. You made me curious to see what would happen if they left a 500K estate so I ran the numbers again.

    To recap, right now, if they take SS at 65 they have a lifetime living standard of 82,403; if they take SS at 70, they have a lifetime living standard of 88,196. (7% difference).

    If they plan to leave a half-million dollar estate–taking SS at age 65–their living standard from age 60-100 becomes 69,980; if they leave the same 500K estate and take SS at 70, it becomes 74,791. That also is an advantage to them that represents a 7% difference. So it would appear that the economics don’t change much if they decide to leave money in the bank when they die.

    What I can see–and this may be part of your point–I said in the article that if they die at age 68 they have still had a 7% higher living standard from 60-68 than they would have had if they took SS at 65. This is true, but they would be spending down there assets during this period to finance that higher living standard while waiting on SS to kick in. Consequently, their children would have less to divide up after their funeral. Good observation.

    Dan

  14. Excellent, thorough discussion.

    One thought: It’s quite likely that I’m missing something, but it appears to me that this article assumes that the couple intends to spend the money. Don’t things change somewhat if the couple is already provided for via other means and their primary goal is simply to maximize the wealth that they’re able to leave when they pass on?

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