Do the Social Security math

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In response to a retirement planning blog I wrote on my 62nd birthday saying that I wasn’t going to take Social Security until I’m older, Abe responded with his rationale for taking his benefits as soon as he could.

Abe provided some numbers in his post. He said:

“My Social Security at age 62 was $1,650 per month, for a total payout of $79,200 to age 66 (full retirement age). By waiting to age 66, I would have to live to age 78 to break even on return of cash, without any interest. By waiting, I am really buying an annuity with close to a zero rate of return. Actually, it’s much worse than that, in that none of my payouts in this ‘annuity’ created by waiting are guaranteed or insured. For example, if I died at age 66, I would have lost the entire $79,200 that I gave up. Even if I make it into my 80s, I still have an annuity with an interest payout at close to zero, as my contributions from age 62 to 66 would have gone 20 years without a dime of interest being paid. By waiting from 62 to 66 you are buying the rawest deal in annuities ever invented.”

Is there a ‘right’ time?

There is no right or wrong Social Security strategy. When to take it is a very personal decision, but there are some basic assumptions worth considering that argue for delay in Abe’s example.

Using the free AARP Social Security calculator, if Abe turned 62 this year, and he were entitled to $1,650, then working backward, his benefit at 66 would be $2,195 per month, plus the cumulative cost-of-living adjustments, or COLAs. By waiting until age 70, his benefit would be $2,897 per month, plus the cumulative COLAs.

I have access to Social Security Planner, software that allows purchasers to estimate the value of a Social Security benefit in various ways. I added a 2 percent COLA to Abe’s benefit and calculated the difference between the amount he would get if he claimed at 62 and what he would receive at age 66, full retirement age for him, and age 70, assuming that he would live no longer than an estimated life expectancy of 84, which the Social Security Administration and the U.S. Census say is average.

  • If he claims $1,650 at 62, with a 2 percent average COLA, he would get a total of $559,040 by the time he reached 84.
  • If he claims at full retirement age, 66, with a 2 percent average COLA, he would get a total of $620,958 by age 84.
  • If he waited until age 70, given the same circumstances, by age 84, he would have received a total of $666,840.

In this scenario, the difference between claiming at 70 and claiming at 62 is $107,800. Plus, the longer Abe lives, the more attractive delaying a claim becomes.

If Abe were married — or even divorced after 10 years of marriage — the claiming strategies open to him are more numerous. For instance, if he waits until age 66, he can claim a spousal-only benefit based on his current or former spouse’s income (as long as he remains single) and let his own benefit increase until age 70. That strategy could increase his total return significantly.

The bottom line: Deciding when to take Social Security isn’t a slam-dunk. Taking it at 62 is rarely the smartest strategy if you are able to continue working and you have every reason to believe you’ll live an average or longer lifespan.