Should You Delay Your Social Security Benefits?

Should You Delay Your Social Security Benefits?

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There was an interesting comment from a reader, ToughMoneyLove, regarding the benefit of delaying your retirement because the Social Security Administration gives you 8% bump in benefits each year. Here’s that part of the comment:

For your Mom, she will get an 8% bump in benefits for each year she delays taking SS until age 70. Definitely consider that. Where else can you get a guaranteed 8% return?

Delaying Your Social Security Benefits is BAD

This may look good at first, but while you are delaying your Social Security benefits, you are receiving nothing. So you are giving up a whole year worth of Social Security income for an 8% increase next year. Let’s illustrate the point with this table:

Should You Delay Your Social Security Benefits? 1

If I stop working at 62, I get the reduced benefits of $18,156 for the rest of my life. That may sounds like a bad deal, but if I wait until my full retirement age (67 years old), it would take me 12 more years (to the age of 78) to catch up in the total Social Security benefits received. If I do not live to 78, I lose. The issue is even more pronounced if I wait until 70 — I would have to live to 82 to beat the system. With the average lifespan of American male being about 75, I am definitely NOT doing myself a favor by waiting.

Should I Start My Social Security Benefits Early If I Am Working?

If you receive benefits before reaching your full retirement age, your benefit amount will be reduced. Specifically,

  • In the years before you reach full retirement age, $1 in benefits will be deducted for each $2 you earn above the limit ($13,560 in 2008)
  • In the year you reach full retirement age, $1 in benefits will be deducted for each $3 you earn above the annual limit ($36,120 in 2008)
  • After your full retirement age, your benefits will not be reduced no matter how much you earn.

Let’s assume that we only get 50% benefits between 62-66 and 67% at 67, this is what the table will look like:

Should You Delay Your Social Security Benefits? 2

In this case, it doesn’t matter if we collect at 67 or 70 because the scenario stays the same as above. However, these penalties make early retirement less attractive if you continue to work. In the example above, it you’re planning to work past 62, it may be worthwhile to wait until full retirement age. Once you live past 72 years old, you’ll be ahead of the curve.

Key Counterpoints From Comments Below

  • You may want to delay taking your benefits so that your surviving spouse can enjoy a larger monthly payment.  This is even more important if your spouse is a younger female (since women live longer than men). — ToughMoneyLove
  • You need to understand the whole retirement funding picture because there are some advantages in drawing from your 401k and IRA early on, while delaying your Social Security benefits. — ToughMoneyLove
  • Life expectancy varies by when you were born and how old you currently are, so this dynamic needs to be considered carefully into the equation. — MITBeta
  • You may want to start collecting early if you have spouse and young children that are eligible for dependent care. — Zeke

For more information, please visit the Social Security Administration web site.

55 thoughts on “Should You Delay Your Social Security Benefits?”

  1. I saw an interesting article last week referring to something I had never heard of. Say you start taking benefits at 62 because your family has a history of early deaths and you want to make sure you get something before you expect you might die. If by chance you happen to be totally healthy 5 or 10 years later, you can actually pay back all the money you collected, and then begin drawing at the higher rate as if you had not started collecting at age 62. Of course that requires having a large chunk of cash laying around, but it could be useful in some situations.

  2. Pinyo: One other factor to consider is whether you have a spouse who will be dependent on your benefitt. If she outlives you her survivor benefit will be increased also if you wait. My wife is 4 years younger and her own benefit will be very small. She would very much appreciate having her survivor benefit be as large as possible after I leave this earth. Anyway, keep this in mind when you are considering an early benefit.

    The second other factor to consider is consumption smoothing. If your goal is to maintain a steady standard of living in retirement, by delaying SS you can use more of your retirement funds early in retirement to maintain your standard of living, then cut back when SS kicks in at 70 to replace it. This is a good planning tool to smooth things out overall. Think about it.

  3. Additionally, age is not the only factor to consider when deciding when to claim Social Security. Retirees should also consider whether or not they intend to work, which can temporarily reduce benefits and increase taxes if their earnings are too high, and review their spouse’s plans before collecting their due.

  4. I agree, makes no sense to delay at all. I figured out I had to live until 85 to break even. Sheesh. Why don’t they just tell you that? Even the government is sneaky.

    Give me the money.

  5. Interesting and thorough post, but as MITBeta says life expectancy is the wild card. Even when you have lived to 75 – the average life expectancy at birth for all American males – you still have a life expectancy of 84. At 84 your life expectancy gets extended to 88 and so forth. As all things in personal finance, this issue depends on a person’s individual situation.

  6. This sort of thing is actuarially adjusted for so that there’s no advantage either way (assuming that you don’t know your own lifespan).

    For example, whilst the average male lifespan may be 75, I bet that the typical 70 year old male has a remaining lifespan of 12 years. (i.e. if you make it to 70, on average you’ll make it to 82).

    You can really only make a decision that is likely to benefit you if you know that you are likely to live longer/shorter than average.

  7. Good argument from both sides. Personally, I’d take my benefits as soon as I reach my full retirement age. I am not betting on living past 82 to make it beneficial to me.

  8. # In the years before you reach full retirement age, $1 in benefits will be deducted for each $2 you earn above the limit ($13,560 in 2008)
    # In the year you reach full retirement age, $1 in benefits will be deducted for each $3 you earn above the annual limit ($36,120 in 2008)

    What is the difference between “the limit” and “the annual limit?

    Is “the limit” not an annual limit?

  9. Scott Burns in his latest book “Spend ‘Till The End” makes the arguement that if you spend down your 401(k) money first in your 60s and then take full Social Security when you are 70, instead of vice versa, you’ll have more money and more secure money. Social Security is taxed differently than 401(k) and IRA withdrawals so even if you spend every dime of your 401(k)/IRA at 70, you’ll pay less taxes which leads to a greater standard of living. Plus, you are trading in the whims of the stock and bond markets for the safety of Social Security which is inflation adjusted every year. Alas, most people won’t have enough in savings and will have to take SS as early as possible to make ends meet.

  10. Wow, a lot of interesting discussion here!

    @Steve — I will have to look into that, but I think very few people would be able to manage something like that.

    @ToughMoneyLove — Excellent point about spousal benefits and to look at the whole retirement picture that include 401k, IRA, and pension. I have to think about it more carefully. It’s easier to say which is better or worse when I look at SS in its own silo, but it’s a lot more complicated when other factors are involved.

    @MITBeta — Thank you for sharing the link. It’s very good information.

    @Sam — I agree, and I did take that into consideration. Good point about looking at both spouses plan in conjunction.

    @Greener Pastures — That was my point, but there are so many good counterpoints mentioned here. I am reconsidering, but haven’t changed my stance yet.

    @Vikri — Definitely no one size fit all in personal finance.

    @Plonkee — I think that’s the intention of SSA, and you’re right about taking family history into consideration. It’s more difficult for me to estimate since all four of my grandparents died early due to accident.

    @Terry — They are the same. Sorry.

    @Dave — Thank for sharing that. It’s something that I’ll need to investigate, but the logic appears to be sound.

  11. My mom will probably take hers early, but only because she’s got a very short life expectancy. Her feeling is “might as well.” But otherwise I think she and dad would have put them off for a few years at least. Dad probably will.

  12. @Terry — They are the same. Sorry.

    Um, $13,560 and $36,120 are definitely NOT the same. (grin)

    That is why I asked the question.

  13. @Mrs. Micah — That’s very sad about your mom. I am sorry.

    @Terry — I thought you meant the “limit” and “annual limit”. As far as the limits of $13,560 and $36,120, there’s greater penalty during the earlier years which is reduced during the full retirement year (thus greater limit). Once you reach full retirement age, there’s no longer any limit.

    I hope that clears it up.

  14. I had an additional consideration. At age 65 my children were ages 11 and 9. This meant that SS payments for me also brought monthly checks for the daughters. Since theirs would end at age 18, a five year delay would cut their eligibility to two years and four years respectively. I chose to take the 87% increase as early as possible.

  15. What if you can’t afford to quit at 62? Boy, I sure would like to…but it ain’t a-gunna happen. Meanwhile, I earn enough that Social Security payments would be entirely confiscated.

    I blogged on this topic a week or two ago, to report the discovery that you can collect before your “full” retirement age (LOL! far as I’m concerned, that arrived at about age 42…but the gummint doesn’t see it that way!), invest the money and make some change on it, and then at age 66 or 70 turn it back to the government, get your taxes fully refunded, and collect the full amount you’d be entitled to at the older age.

  16. My husband will be 62 this October the 10th, 2008. If he delays taking SS at 62, can he decide to start drawing social security at 63 or 64 or any other age that he chooses between 62 and 661/2?

    Also, if he decides to starting drawing his social security at 62, how much additional yearly income would he be allowed to make in addition to his social security without being penalized?

    I hope those questions make sense to you? I would really appreciate an answer.

  17. @W. W. Paddock — I’ll try my best to answer your questions, but you should sit down with a financial advisor who can review your situation more in depth.

    “If he delays taking SS at 62, can he decide to start drawing social security at 63 or 64 or any other age that he chooses between 62 and 661/2?”

    The answer is yes, each year that you wait the benefits will increase slightly. For example, if you wait until 64, your monthly payment will be higher than if you start at 62.

    “Also, if he decides to starting drawing his social security at 62, how much additional yearly income would he be allowed to make in addition to his social security without being penalized?”

    Currently, it’s $13,560 per year. If you make more than that, your social security benefits will be halved.

    I hope this helps.

  18. I’m wondering about my situation. I am 65 and can get full social security without a reduction, but my salary is high and I hope to keep working until I’m 70. On the one hand, it seems like starting SS is good because I can bank the whole check.

    But what about taxes? The additional income would put me in that “over 250K a year”, which may end up taking a huge chunk of that SS check.

    Your tables don’t take that into account.

  19. @Iwe – I don’t know what to say. If you make that much money you should be talking to a financial planner, and not asking a blogger. 🙂

  20. Being a blogger didn’t stop you from discussing it with others. If I was rich, I
    WOULD retire. Anyway, my phone appointment with SS was today, and I
    told them I would try to wait till I’m 70. By the way, my financial planner just
    finds ways to throw my money away in bad investments. 🙁

  21. Well, I was thinking of my work income plus the SS income, but I wasn’t thinking
    clearly. I still wouldn’t reach 250K.

    But the question still applies. The tables seem to be based on a
    person who starts SS at 66 but also retires and so isn’t in a high tax bracket.

    Unless I’m missing something.

  22. I turn 62 on August 13, 2009 and plan to collect my SS then. I have been told I would not receive my first check until October or November, 2 months later. When should I expect my first check?

  23. With the average lifespan of American male being about 75, I am definitely NOT doing myself a favor by waiting.

    Hmm. Do you use the same logic for whether or not to buy insurance on your home or car? We are risk averse and we buy “longevity insurance” because we might live to age 95. Who wants to bet on dying at the “average.”

  24. Yes, but let me see if I can be a little more clear. The point should not be about average lifespan starting from any age. It’s about the possibility of a long life. If you have a terminal illness or have no other money, then of course, take the SS as soon as you are able. But otherwise, you are always (not *sometimes*) better ahead to use the other funds to get you to age 70, at which point SS kicks in at the higher rate. In other words, it functions as longevity insurance. At least that’s what makes sense to me. If you are smoothing consumption, then you can go ahead and have the higher living standard before age 70 in anticipation of the higher SS return at age 70. I don’t know if that makes sense to you or not. –Dan

  25. Yes, my thinking on this has been influenced a lot by Kotlikoff at ESPlanner. See his case study, “When should I take Social Security?”


  26. @Dan – Interesting point, however, let me throw another counterpoint out there.

    When you’re withdrawing from your retirement savings, the first few years make a huge impact down the road. Wouldn’t it be better to use SS to lower the amount you need to withdraw so that your retirement savings can last longer?

  27. You are saying that by lowering the amount you have to withdraw, you are leaving more to earn interest. That is a factor, but not enough to overcome the 8% per year boost you make for each year that you delay after your full eligibility. That extra amount of SS is given to you year after year–*and*–it’s adjusted for inflation. It’s a longevity annuity. Taxes are also an issue. With the models I’ve looked at, you don’t need to withdraw as much as you might think from the 401(k) because your taxes are so low with so little income until the SS kicks in at 70. So with fed and state taxes being so low, you keep the same standard of living without withdrawing so much. I could model this in ESPlanner if you wanted me to illustrate–just give me some numbers. It might be fun to compare. –Dan

  28. If I begin receiving social security retirement benefits at 62 & want to stop receiving benefits, can I choose to do that? Can I also choose to start receiving them again at say, 64, 65 so on & so forth?

  29. It seems to me that quality of life is a consideration on when to take your Social Security (SS). Delaying SS will give you more money in your later years but at what cost? Is is better to take your SS when your younger and healthy or to wait for that extra money when a higher probability exists for health problems? I would be of the mind that one shouldn’t assume that your health will permit you to enjoy life. What good does it do you, assuming your living and health care expenses are not an issue, to wait for the extra benefits if you could be too sick or feeble to enjoy them? The quality of our lives at 75 or 80 has a much greater probability of not being near as good as it was when we were 60.

  30. As I pointed out in a follow up article to this one above ( see https://www.moolanomy.com/1428/when-should-i-take-social-security/ ) you don’t have to choose between delay SS and higher income vs take SS now and lower income. Yes, SS pays more when you delay–but by using a consumption smoothing pattern (you need the right calculator) you can have a higher income now and later. In other words, you can take the extra income you will get later, as well as the tax saving you get in the short term because your income is lower, and spread it out over your entire life, beginning at your current age. You don’t need to wait until age 70 to have the higher living standard. It’s explained in that follow up article. This approach addresses the false dilemma between higher income later/lower income now that the “break even” approach presents to us. My claim in this article is that unless you have no other resources or you have terminal illness(or you didn’t plan properly) you are almost always better to delay to 70. –Dan

  31. My wife and I are now 62. I heard if we both sign up and then I stop mine she can still get the 50% spouse rate instead of her own rate which would be about half of that. I can then continue to work and re-start mine at 66. Does anyone know about this tactic?

  32. In this case, a bird in the hand is worth less than two in the bush. I used the basic ESPlanner then splurged for the paid version last week. By delaying to age 70 I come out ahead not only with more to spend each month, but my taxes dropped almost to nothing. It didn’t take long until I saw that by shifting at retirement to spend a mix of cash/IRA first and then SS at 70 I was still left with a nice chunk (SS guaranteed) even if I lived to 100+. By alternating draw downs between the Roth & regular IRA, I can save nearly $4K in taxes over the next couple of decades. Well worth the $150 price tag IMHO.

  33. Do U think S.S. will be around four years from now ? I think I should take mine now while I can I am 64 now make ,about 25,000 this year . More years ago ,, but they cut our hours and increased our insurce payments . I could use the money now.

  34. The charts on waiting versus taking SS at 62 don’t account for inflation do they? Even at 3% inflation per year, waiting until 66 -67 is even less of a deal! That would mean the 8% SS increase would only be equal to 5%. By the way, the charts that the SS office gave me only show about a 6.5% increase per year.

  35. Yes, the charts do account for 3% annual inflation. So it’s all in today’s dollars. The SS charts do not account for the real wage increase that is applied when they actually calculate your return. But if you are close to retirement, they should be pretty close. A factor is your “full age of retirement” which depends on the year you were born.

    I do think SS will be here four years from now, but if you think that all payments will stop in four years, then indeed, you should take your payments now. This is not going to happen though. If SS does go away, it will happen very gradually starting with those just coming into the work force.

  36. Delaying Your Social Security Benfits is Not Bad.

    The Average Lifespan of an American Male is irrelevant. You have to look at the age of the decision maker and their expected longevity from that point in time. Tables that date to 1996 indicate that a 62 year old male will live on average for another 17.5 years or age 79.5. This is beyond the break-even point for waiting for FRA which you point out is 78 years. I would also hazard a guess that this expected longevity calculation has only increased since 1996.

    Delaying Benfits also provides a form of insurance against rising inflation since benefits are linked to inflation. Of course this all depends on whether or not the recipient can work or draw from assets to support themselves up to the point at which they choose to take Social Security.

  37. My wife is 62 (retired) and I am 64 planning retire at 65. Is better off for my wife to start collect benefit now which is much smaller check than half of mine) and then switch to spouse benefit later when I start to collect at 68 (my current planning) or just for her to wait till we both to start to collect when I am 68? Of course, we both assume will live longer than 85. 🙂

    Another way to ask is, will her spouse benefit later be affected or reduced from half of my benefit check if she starts to collect earlier like now?

  38. I use ESPlanner to help make these decisions, but my guess is that it would show you that the best deal is to have her perhaps collect then suspend to trigger the spousal benefit for you–since she’s older. But I’d need to put the earnings history into ESPlanner to know for sure.

  39. I was married for over 20 years, divorced and my ex-spouse has since died. I am currently 64 and have been told that at full retirement I can begin to collect on my ex-spouses SS benefit and then at age 70 I can collect on my own thereby gaining the delayed benefit increases. Is that accurate?
    Also, if I began to collect on his SS now, does that mean a permanent reduction in my benefits even if I collect against my own at a later date? Thanks!

  40. What I do not see being addressed here is about all the near sixty two year olds who don’t want to collect SS benefits but who can’t find employment! There are so many! Does anyone know if the benefit between 62 and 66 increases even if you can’t find gainful employment? I don’t think it does. In this now common place scenario any discussion is moot. Companies age discriminatory to the max but it is near impossible to prove.
    Anyone in the know, please advise.

  41. Iam now 65 , if I keep working and get my S.S. check will I be earning more on it . I will be paying taxes. I was told I would be locked into what ever I get now. That it will not go up because I am working. I can use the extra money now ,but I would like it to grow also. Should I wait another year or till Iam 70 Thanks Carol

  42. You may have to pay taxes on your SS income if your earn too much while working. But you can work. There could also be a pretty severe penalty on your benefits if taking SS before full age of retirement.

    Look, these are complicated decisions and as my original article points out, it’s not just about the dollars you get today or this year–it’s about your full economy from the present through the possible age you might live to. These decisions are so important, I don’t see why people won’t spend $150 to get a program to figure this out and make the best decision. You have much more than that to lose by making a wrong decision. Just go to http://www.esplanner.com and purchase the $150 program.

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