When to start social security


Henry K. Hebeler



Some financial planners recommend taking social security early if you retire early.  This is based on the assumption that you will save and invest your early social security money and live shorter than or equal to the breakeven age, that is, the age where you will accumulate the same present value of payments no matter when you start.  The breakeven age is usually a little over age 80.  In fact, taking early social security when retiring early is the best answer if (1) you believe you will die early in retirement, or (2) you have not saved enough to even consider taking social security at a later age, or (3) you believe that the government will soon default on future payments.


Other than those exceptions, those who have saved enough will generally do better by starting social security at a later age.  It’s not hard to do your own comparative analysis by using the free social security calculator on www.analyzenow.com or the Dynamics program from the same site which covers more conditions. 


An illustration for a single person with return equal inflation:


Let’s consider the three different ages in a retirement report for someone who has just reached age 62 and is deciding whether to take social security of $1,500 per month at 62, $2,000 at 66 or $2,723 at 70.  Initially we’ll assume that this person will be able to invest $500,000 from a deferred-tax account so that returns just equal inflation.  (Later we’ll look at the case when returns exceed inflation by 2%.)  We’ll use a ballpark 15% tax rate assumption except that only 50% of social security will be taxed.  We’ll use the social security calculator on www.analyzenow.com for the illustrations that follow.


Figure 1 shows what would happen (in today’s dollar values) to lifetime spending if the retiree spent $3,000 per month or $36,000 each year until running out of savings.


Figure 1.  Delaying the start of social security until age 70 provides the best solution for this 62 year old.


What we learn from this example is that the retiree is better off from his own personal considerations if she delays starting social security until age 70 because she could continue to spend $36,000 (plus inflation adjustment) all the way till age 94 at which time her investments were exhausted and spending would be completely dependent on social security.


Figure 2 shows the savings history in today’s dollars corresponding to the spending in Figure 1.


Figure 2.  Investment histories.


By way of contrast, if she started taking social security early at age 62 and began with $500,000, she would have exhausted investments at age 84, after which she would have only about half as much income as if she would have started social security at 70.


On the other hand, if she dies shortly after retiring, her heirs would be better off if she started social security early.  However, if she lives past age 80, then the heirs would be better off if she delayed taking social security until age 70.




An illustration for a single person with return 2% above inflation:


Figures 3 and 4 show what would happen if the retiree could earn a 2% real return.  Some people will think this is easy, but real retirees experience investment costs and reverse-dollar-cost-averaging that can take a punishing blow to retiree’s investment returns.  Those who invest in currently taxable investments will find it even harder, particularly as they drift towards large fixed income allocations late in life.


Figure 3.  2% additional return increases the age for exhausting investments but does not change conclusions.


The primary difference between the Figures 2 and 4 cases is that the money lasts longer with the higher return.  Nevertheless, you would come to the same conclusions.




Figure 4.  Investment histories with 2% more return.


If married, pay attention to spousal benefits:


A spouse gets whichever is the larger of (1) the benefit from the spouse’s own working career or (2) up to 50% of the higher wage earner’s full retirement age (FRA) benefit which occurs between ages 65 and 67 depending on the birth year.  If the spouse starts taking payments after the higher earner is taking payments and after the spouse’s own FRA, then it’s the full 50%, but if the spouse starts taking social security early, say at 62, then the amount is only 37.5% (or less at larger spousal FRAs) of the higher earner’s FRA benefit.   You can get particulars for your situation on www.ssa.gov.


The social security rules put pressure on the lower income spouse to wait until the lower income spouse’s FRA.  Since the lower income surviving spouse gets 100% of the higher earner’s social security after the higher earner’s death, there is also additional pressure for the higher earner to delay taking social security as long as possible.


An illustration for a married couple with return equal inflation:


It’s more difficult to analyze results for married people, particularly when one spouse has not worked at all or has a significantly lower earnings history than the other spouse.  We’ll illustrate this with an example where we’ll assume that the husband is the high earner and dies at age 75.  We’ll further assume that the surviving souse can live on 67% of the inflation-adjusted income that they had when they started retirement.  Both spouses are the same age.


All of the other assumptions are the same as with the single person, e.g., $500,000 in a deferred-tax account, the husband’s social security at age 66 is $2,000 per month, 15% ordinary income tax, 50% of social security is taxed, and so on.  Because there are now two people contributing social security, we’ll increase the spending to $4,000 per month or $48,000 per year.


Again we’ll look at starting social security at three ages.  In the first case, both start social security at age 62.  In the second case, both start at age 66.  In the third case, the higher earner starts social security at age 70, but the lower income spouse starts at age 66 since that provides the maximum social security income.


Again we’ll use the social security calculator from www.analyzenow.com for the illustrations.  The results are in today’s dollar values.  Figures 5 and 6 illustrate what happens when the higher earner dies at age 75 and the survivor can live on 67% of the income when both were living.


Figure 5.  The best results are when the higher earner starts social security at 70 and the low income spouse at 66.


Figure 6.  This couple exhausted their investments relatively early which puts a premium on delaying social security.


An illustration for a married couple with return 2% above inflation:


In this case, we’re going to assume that the retirees start off spending the same amount, that is, $4,000 per month or $48,000 per year.   The higher earner will still die at age 75.  The only change is that we’ll increase the real return from 0% to 2%.


Just as with the case of the single person, the additional return in Figures 7 and 8 pushes out the age where investments are exhausted, but you would largely reach the same conclusions, namely, that the survivor is generally better off if the higher earner starts social security at age 70 providing they have sufficient funds to support them until social security income begins.


Figure 7.  2% more return stretches the results.


Figure 8.  Investments last longer with 2% more return.



Text Box: With few exceptions, the best choice is to delay the higher earner’s social security to age 70 and the other spouse’s social security until that spouse’s full retirement age (e.g., 66)—if savings are sufficient.    To implement this, it may be necessary for the higher earner to “file and abandon” just before the higher earner’s full retirement age.  See the Social Security Administration for the necessary paperwork.







Copyright © 2006 Henry K. Hebeler