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Social Security is a Year-by-Year (or Month-by-Month) Decision

For simplicity’s sake, writers and financial advisors often compare claiming Social Security at 62 to claiming at 70, in order to show the difference between the two extreme strategies. But in reality, the decision should be made step-by-step along the way. (“Do I want to wait a year? Do I want to wait another year?” And so on.)

This is important because many people look at waiting until age 70, decide that 70 is too far in the future, and therefore default to claiming as early as possible at 62. That’s unfortunate because, even for people for whom claiming at 70 doesn’t make sense, claiming at 62 is still usually a mistake.

For example, if you are an unmarried person, currently age 61 and trying to decide whether or not to claim Social Security ASAP at 62, you don’t want to compare claiming at 62 to claiming at 70. You want to compare claiming at 62 to claiming at 63. When we do that, we can calculate that the breakeven point is age 78. (That is, if you live to age 78, you are better off having claimed at 63 than having claimed at 62.) Using the 2011 actuarial tables from the SSA, we can calculate that for an average 62 year old male, there is a 67% probability of living to age 78. For a 62 year old female, there is a 76% probability. Conclusion: For most unmarried people, it makes sense to wait at least until 63, because there is a much greater than 50% probability of living to the breakeven point.

Then, at age 63, we would want to see if it makes sense to wait until 64. The breakeven point between claiming at 63 and claiming at 64 is age 76. Using the same actuarial tables, we can calculate that for an average 63 year old male, there is a 74% probability of living to age 76. For a 62 year old female, there is an 82% probability. Conclusion: It probably makes sense to wait another year.

And then you would repeat this analysis every year. (In theory, you should actually do the analysis every single month to see if it makes sense to wait one more month. But that would be a heck of a lot of work. In my opinion, it makes sense to reassess annually — or whenever you get new information about your life expectancy.)

For somebody with a full retirement age of 66, the year-by-year breakeven ages would be as follows:

Claiming Ages
Breakeven Age
62 vs. 63 78
63 vs. 64 76
64 vs. 65 78
65 vs. 66 80
66 vs. 67 79.5
67 vs. 68 81.5
68 vs. 69 83.5
69 vs. 70 85.5

And for somebody with a full retirement age of 67, the year-by-year breakeven ages would be as follows:

Claiming Ages
Breakeven Age
62 vs. 63 77
63 vs. 64 79
64 vs. 65 77
65 vs. 66 79
66 vs. 67 81
67 vs. 68 80.5
68 vs. 69 82.5
69 vs. 70 84.5

To be clear, the above discussion is a simplification, meant to illustrate the general concept that the decision should be made year-by-year rather than simply asking “Should I claim at 70 or at 62?” A real-life analysis of your personal situation should ideally include a few other factors:

  • Investment return earned on early-received benefits. In the above discussion, we’re assuming that early-received benefits earn a 0% real return (i.e., they precisely match inflation). Given that the yields on TIPS (i.e., the investment with a risk level most similar to that of Social Security) are currently at or near zero, that’s a pretty reasonable assumption. If real interest rates were higher, the breakeven points would be pushed back somewhat.
  • Tax planning. The specifics vary from person to person, but in most cases tax planning is a point in favor of waiting to claim benefits, because of Social Security’s tax-advantaged nature.
  • Spousal and survivor benefits for married couples. (As we’ve discussed before, for married couples, at least one spouse usually should be using one of the “extreme” strategies of filing at 62 or at 70.)
  • Longevity risk. For anybody who is concerned about running out of money due to a very long retirement, delaying Social Security is often a good decision, even if there is a less than 50% probability that they will live to the breakeven point in question.

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Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
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