Ready to claim Social Security? Here’s the best time to start collecting payments

That’s the question virtually every retiree has: Is it better to claim your Social Security benefits early or wait? It’s a difficult question to answer, partly because everyone’s situation can be drastically different, but also because of the serious disadvantages of surviving on one’s income.

Unfortunately, many seniors are unprepared for this difficult decision, and the Social Security Administration (SSA) and representatives do a poor job — one expert says, “terrible” — of helping retirees decide when to claim their benefits.

Let’s run through some numbers, including a back-end analysis of when you could break even on Social Security and why you might wait to claim your benefits until age 70.

When can you claim Social Security and what will you earn?

The earliest you can claim Social Security benefits is age 62. In 2020, about 23.5 percent of men and 25.7 percent of women claimed their retirement benefits by age 62, according to the SSA. But you don’t get your full pension benefit at that age, meaning retirees settle for a much smaller benefit in perpetuity rather than waiting for more.

But what are the concrete costs of waiting for a bigger paycheck? A lot, actually.

You will receive your full benefit if you claim it at full retirement age (age 67 for those born in 1960 or later). And you’ll receive extra benefits if you don’t claim your check until you’re 70. After that, though, you won’t receive any bonus payout, so there’s no need to wait until after 70.

If you claim your benefits early, you will lose five-ninths of 1 percent of your benefit each month for up to 36 months before normal retirement age. If you file more than 36 months early, you will lose an additional five-twelfths of 1 percent per month. So if your normal retirement age is 67 and you apply at 62, you will lose 30 percent of your total benefit (that is, 36 x 5/9 + 24 x 5/12).

So if your full benefit was $1,000 a month at age 67, you’d only receive $700 at age 62. (Here’s the average Social Security check).

The story continues

In addition to incentivizing you to wait until your full retirement age to claim your benefit, Social Security also incentivizes you to wait longer. You get an additional 8 percent annually if you wait up to three more years after full retirement age if you were born in 1960 or later.

So if your full benefit was $1,000 a month at age 67, you would receive $1,240 at age 70.

“The benefit is 77 percent higher, adjusted for inflation, at age 70 than it is at age 62,” says Laurence Kotlikoff, a professor of economics at Boston University and co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” “Social Security has a big payoff for waiting.”

With those numbers out of the way, let’s go through some basic analysis to see when it might make sense for the average person to claim their benefit. Then we’ll go over why it might not make sense for you or another person to do what’s reasonable for the average person.

At what age do you start receiving social security?

If you want to maximize the amount you withdraw from Social Security over your lifetime, consider doing a break-even analysis to see when it’s best to file. In other words, do you maximize your lifetime take home amount by claiming early and having more years of Social Security or by waiting (say until age 70) and then claiming a much larger benefit?

For simplicity, let’s assume your full retirement benefit will be $1,000. We also assume 2 percent annual increases in the benefit, applying it to both the actual benefit paid from age 62 as well as the accumulated benefit to be claimed later at age 70.

So at age 62, your first monthly benefit would be 30 percent less than your full benefit, or $700 total. At age 70, your benefit will be $1,240 plus cost-of-living adjustments in the interim.

Here’s how the numbers break down and a break-even age for claiming Social Security.

Source: Social Security Administration

Somewhere near age 78, the later filer overtakes the younger filer in total money taken from Social Security. From there, as you can see, the later branch takes out at least $9,000 annually more than the earlier file, or at least an additional $750 per month.

Run this analysis to age 90 for both groups, and you’ll see that the later filer accumulates more than $103,000 extra from age 80 to 90 — more than $10,000 each year. In total, this late branch receives about $123,659 more than the early branch at age 90. Of course, if your benefit check was double this hypothetical starting amount, or $2,000, you would also receive double the lifetime benefits, with these assumptions built in.

Obviously, if you plan to live long—few people plan otherwise—waiting to file is the better option, all things being equal. The problem is whether a person lives long enough to collect the extra. So let’s look at the average life expectancy for someone aged 62 and 70.

According to the US Census Bureau, the life expectancy for a man at age 62 is to live for about 21 more years, a total life expectancy of 83 years. For a 70-year-old man, the life expectancy is about 15 more years, i.e. a total life expectancy of 85 years. Of course, the older you get, the longer your life expectancy. For women, life expectancy is 2.8 and 2.2 years longer, respectively.

A break-even analysis suggests that later filers will begin to take more total earnings than early filers at age 78 or so. But these groups are expected to live quite a bit longer than that, so they should prefer to file at age 70 and take more money during their lifetime. But according to Social Security data, only 5.9 percent of men and 7.5 percent of women filed in 2020 at age 70 or later.

Is it crazy that so many retirees are signing up so early? No. If only for the simple reason that we are not all average people. But there are also other reasons.

The main reasons to start your social security benefits early

Americans have several good reasons to file for benefits early, but most would be much better off waiting until age 70, Kotlikoff says.

“For 85 percent of Americans, filing at age 70 is the best option,” he says, but only a small handful are. “Some Americans have to start earlier for cash flow reasons or other reasons.”

Here are some reasons why Americans might consider filing for retirement early.

You need the cash flow now

The state of Americans’ retirement finances is poor, to say the least. A recent Bankrate survey found that 55 percent of American workers say their retirement savings are behind where they need to be.

For many, taking longer to wait for that extra cash flow from Social Security is a difficult choice, especially if you have bills that need to be paid now. How to estimate your social benefits.

You don’t expect to live much longer

Many Americans may claim Social Security early because they simply don’t expect to live that long, for whatever reason. Although an American man’s life expectancy at age 62 is projected for another 21 years, according to the Census Bureau, many will not reach that age. So claiming your benefits early can be a rational choice.

You are not interested in maximizing your advantage

Many retirees may be disinterested in maximizing their lifetime benefits due to the uncertainty surrounding health and aging. They are alive and able to enjoy life, so they want the money to do it now, not years later. Many may also want to escape the grind of the workday and enjoy the relaxation of retirement — and Social Security is helping them do that now. Others may have plans to travel, see family, or pursue other pastimes that they have had to neglect during their lives.

You have a special situation

“There are 13 benefits through Social Security, and most people know about the retirement benefit, but not the other 12,” says Kotlikoff.

Social Security offers a variety of benefits to people in many different situations, including the disabled, former spouses, survivors, minors, as well as retirees. Therefore, a simple break-even analysis like the one above is too narrow to provide real guidance. It is illustrative rather than prescriptive and offers a basic scenario that probably won’t apply to most people.

Because of this range of benefits, you need to create a plan that fits your needs. Kotlikoff advises potential filers to consider their situation and be careful when talking to Social Security workers, who, he says, often give you bad advice that isn’t tailored to your situation.

“They give advice, and it’s almost uniformly bad advice,” he says.

The top reasons to wait until age 70 to claim Social Security benefits

Just a few percent of retirees wait until age 70 to claim their Social Security benefit, which is a whopping 24 percent above their full retirement benefit.

What are some reasons why Americans should consider waiting longer to receive their benefit?

You expect to exceed the average lifespan

A break-even analysis can help guide your decision, but no one person is the average person.

“The whole idea of ​​breakeven is to play the average,” says Kotlikoff.

There is good reason to believe that you will live longer than the break-even time, giving you more money later and also for the rest of your life.

You don’t want to outlive your money

Citing figures from Social Security, the Bipartisan Policy Center says, “15 percent of 62-year-old men will reach (age) 92” and “14 percent of 62-year-old women will live to at least 95.” The center adds: “If a beneficiary claims early and outlives other assets, they may have to survive only on their reduced monthly benefit for the rest of their lives.”

Outliving your money is one of the biggest dangers for those with poor retirement finances. You can end up with severely limited cash flow and have little or nothing you can do about it.

“Look at the worst-case scenario and play it safe,” says Kotlikoff.

You want to maximize your Social Security payout

If you’re set on getting the maximum amount from Social Security — you’ve probably been paying into it for decades, after all — then filing later makes it more likely. Of course, there is no guarantee that you will, but you max it out every year you withdraw money past the break-even point.

Of course, if you don’t expect to live long, you will max if you apply earlier. But the actual answer to this question will only unfold in the fullness of time.

Bottom line

Finding the right age to take Social Security is a complex task, even with good information. It becomes even more complicated – and sensitive – when retirees have to consider their own life expectancy when making a decision. But it’s also important to consider other issues such as taxes and other sources of income, both of which can change when you decide to take Social Security.

So if you want to maximize your returns, it’s important to work with an advisor who specializes in these kinds of knotty issues. You could quickly earn back the advisor fee with the right decision.