When Should I Take Social Security?

One common piece of advice given to those planning for retirement is to delay taking your Social Security benefit, as each year you delay increases the benefit.  So, is that good advice?

The first part of answering that question is to determine whether or not you NEED to take those benefits at the earliest possible moment.  In other words, if you have been laid off or have become disabled and have no other means of support, then no, you should not delay taking your benefits.  Rather you need to learn to live within the means provided by the benefits you have.

Early Retirement

Social Security retirement benefits can be claimed as early as age 62; however, the amount you receive is less than if you retired at your normal retirement age (for me, 67) and, if you continue working and earn over $16,920.00 your benefits will be reduced by $1 for each $2 over that amount.  In short, unless you are talking a low-wage job or very part-time work, it is probably not worth it to take your Social Security before your full retirement age unless you really are retired. 

But what if you are retired (or want to be)?  You are entitled to take your Social Security benefit at 62 but the benefit amount is reduced.  For example, my husband's benefit would be about $3800 per year less if he took his benefit at 62 as opposed to 66.  Assuming we did not need the money to make ends meet, and assuming he was earning less than $16,920 per year, he would collect over $58,000 between 62 and 66. 

According to this calculator if he deposited his monthly benefit in an account that earned 2% per year, by the time he reached his normal retirement age of 66, he would have about $69,000.  If he no longer got interest on that money (trying to make the math easy) but withdrew $3,800 per year thereafter (the amount by which his check was reduced due to taking it early) it would take about 18 years (or until he was 84) for that account to be down to nothing.  If he died before that, he clearly came out ahead taking the benefits early. 

Families with Minor Children or Disabled Adult Children

One thing many people do not realize is that Social Security provides benefits to minor children and to disabled adult children of retirees.  When my husband is 62, he will have a daughter who is 14 and a disabled son.  

There are online calculators, generally available for a fee,  that will help you estimate what happens  under various scenarios and if your family is anything but two wage earners who plan to take their own benefits at full retirement age, I recommend trying one of them (nope, no links at this time--no affiliate agreement either). 

The calculator I used showed that if my husband "retired" at 62 but kept his full time middle-income job, he would reduce his yearly benefit by about $3800 per year, as noted above;  however, he personally would not collect anything, because of the earnings deduction--taking away $1 for every $2 income over $16,920.

For us, the advantage to him "retiring" at 62, but continuing to work,  would be that  once he starts taking his benefits, my son and daughter would be entitled to benefits and I would be eligible for spousal benefits to care for kids (but those too are subject to the earning deduction).  In short, in the years between my husband's early "retirement" and his full retirement date, we would collect over $79,000 from Social Security for the kids.  Now, my son is currently receiving Social Security Disability benefits based on his own work record so if he took these benefits, he'd lose his own, so the total gain to our family is closer to $40,000. Using the same calculator as above, adding 2% interest per year, means we'd have about $42,500 by the time he retired, or about eleven years worth of the difference between what he would get at 66 vs 62. 

One thing I noted was that the benefit of the disabled child is the same, whether you retire early, on time, or late.  His benefit is a percent of your normal retirement benefit.  While you could assure a higher benefit for a disabled child by working longer during your high-income years (if that is what your 60's are), if continuing to work will not affect your normal retirement benefit, it is not necessary to delay taking Social Security to maximize the income of your disabled child

Regular Retirement

Once you reach your regular retirement age (66 for my husband, 67 for me), there is no reduction in benefits if you continue to work.  Again, the first question is whether you need those benefits in order to eat regularly.  If not, if delaying them is an option, then it is a math question.

 Let's say I am trying to decide whether I should take my benefits at 67 or at 70.  Social Security estimates my benefits at 67 to be $1855 per month and my benefits at 70 to be $2329 per month.  So, what's the math?

If I earn 3% per year on my benefits for three years, at the end of three years, when I turn 70, I'll have $69,787.23.  However, I'll be getting $474 less per month than I would had I wanted until 70.  

To make the math easy, I'll assume no return on the $69,787.23 after I reach age 70, and divide it by $474 to find out how many months until I break even.  The answer is that it will take me 12.26 years to break even, or until I am 82.  Tack on a little interest and the break-even point extends out even further.  

When Should I Take Social Security?

It's too bad none of us have a crystal ball; if we did the answer to this question would be simple math problem--which method will give me the most money over my lifetime?  The system is designed to pay the average person with an average lifespan the same amount of money whether they take Social Security early or late.  While a diagnosis may tell you that you are likely to be one who dies early, those who die late often surprise themselves.  

Unless there are dependents involved, there seems to be little reason to take Social Security before your normal retirement age, if you are still working a full time job.  Your benefits are reduced because you took them early but you collect only a portion of the benefits to which you are entitled because your paycheck reduces your benefits.  

My husband and I are going to go and talk to Social Security and get their official answers about what will happen if my husband takes Social Security next year. If the information we have now is correct, and our "break-even" point is when my husband is 73, we will probably not claim anything at that time--hopefully at 73 he still has quite a few  years left.

On the other hand, with 82 as the break-even point between taken benefits on time vs late, I am inclined to take them on time .  Yes, there is a decent chance of outliving the break-even point, but death at or before 82 isn't rare.  

Also, I've read that it is normal to spend "a lot" on entertainment, travel and home improvements early in retirement, and then, in your late seventies and early eighties, to spend relatively little as your energy levels decline and you spend more time at home.  Then in your late eighties and beyond, health care costs increase.  In other words, taking the money early allows you to spend it while you can still get around.  

Determining when to take Social Security is a personal decision that should be made after considering your options, your lifestyle and your expected lifespan.