But I just don't think it makes sense to postpone retirement
for that bigger benefit!
Let's say Bob starts collecting Social Security at 66, and
gets $2,000 a month. By the time he's 70, he has already collected $96,000 in
benefits. Joe, who's the same age as Bob, works for the next 4 years. At 70,
when Joe starts to collect Social Security, his check is $640 more a month than
Bob's. But Bob already collected $96,000. It will take Joe years before that
extra $640 adds up to the $96,000 that Bob has already received. By the time
Joe catches up, he'll be 80 years old or more, if he's even alive!
Why would anyone wait until 70 just to collect a bigger
Social Security check when he could enjoy four extra years of retirement? -- DS
A: You've made this decision sound like a no-brainer, but it isn't. There are
so many personal variables involved that Bob and Joe may both have made the
right choice.
You're right that you get an 8% annual bonus for up to four
years when you delay taking Social Security after reaching your full retirement
age. But you’ve underestimated the full effect of that bonus: With a four-year delay, your
starting benefit is actually boosted much more than 32% when Social Security’s annual inflation adjustments are added in, says
Christine Fahlund, senior financial planner at T. Rowe Price.
Taking that into account, Fahlund crunched Bob and Joe's numbers.
She assumed that Bob retires at 66 in 2009. She also assumed that each year in the
future, Social Security’s annual inflation adjustment will be 2.8%. That’s the
Social Security Administration’s long-term year-to-year inflation projection.
The result: If Bob retires at 66 with a $2,000 monthly benefit, by age 70 he
will have collected $100,108. At 70, his monthly benefit will have risen to
$2,234 because of the inflation adjustments. When Joe retires at 70, his
monthly benefit will start at $3,039 -- $805 a month more than Bob's
collecting.
Fahlund says Joe's 'break-even' age is a few months older
than age 78. That's the point at which he'll catch up with Bob, and begin to
collect more than the total benefits Bob has received.
So who has the better deal? It depends partly on how long they live. "If
they both live to age 90, Late-Collecting Joe will have received $170,000 more
in benefits than Early-Collecting Bob," says Fahlund. "On the other
hand, if Joe dies at age 69, Bob will have received $100,000 more than
Joe."
That's why it's so important to consider your physical
health and family history before deciding when to take Social Security.
It also matters whether or not you're married: If you
are the primary breadwinner, the bigger your benefit is when you die, the
bigger the benefit for your surviving spouse.
And, of course, you have to think about what your income needs will be in retirement.
It's easy to imagine a few scenarios that might have led Bob
and Joe to make their respective choices. For example:
Maybe Bob wants to take his Social Security benefit at 66
because he has a heart condition and isn't sure he'll make it to age 78; perhaps
he's not married, so a survivor’s benefit isn’t an issue. Or maybe he's in great health
but taking Social Security at 66 will let him quit his job and start writing a
novel -- a dream he couldn't otherwise afford to pursue. Or maybe he just feels
he worked hard for his benefit and wants to enjoy it without further delay.
As for Joe, perhaps he saved a lot more than Bob – enough to afford to quit
work at 66, live on his own savings, and let his Social Security benefit
keep growing until he's 70. Or maybe Joe hasn't yet saved enough to afford a
comfortable retirement at 66. He decides it’s smarter to work four more years,
adding to his savings and boosting his Social Security benefit, so
he can retire in better style.
And maybe Joe's parents and parents-in-law lived into their 90s, and he sees Social Security as a form of longevity insurance for himself and his wife. If he delays taking his benefit until he's 70, by the time he's 95 it will be $6,061 a month, says Fahlund. That's $1,606 a month (or almost $20,000 a year) more than it would be if he'd started taking a benefit at 66.
Please send your
questions to [email protected]. I'm sorry I can't respond personally to every
email. Questions are only addressed online.
(c:) Lynn Brenner, All Rights Reserved
Thank you for this smart, clear explanation. Another scenario I'd like to see you address is a wife who delays collecting her own Social Security but can reduce her work hours (or write that novel) and begin collecting as a dependent when her (older)husband retires.
Posted by: Nina | 08/03/2009 at 10:36 AM
Ms. Fahlund assumes a zero rate of return on the accumulated benefits. Assuming a rate of return greater than zero on the accumulated benefits, it will take Joe longer than until age 78 to catch up to Bob.
Posted by: Bruce Steiner | 08/03/2009 at 06:20 PM
Lynn replies:
True, we didn't assume a rate of return on Bob's Social Security benefit. We figure he's living on it.
If he doesn't need his benefit to cover his living expenses, I'd urge him to postpone filing for it.
What else can he invest it in for the next four years that will give him a government-guaranteed 8% annual return above inflation -- the return he'll get just by waiting to collect it?
Posted by: Lynn Brenner | 08/06/2009 at 10:18 AM
In your initial post you wrote:
"With a four-year delay, your starting benefit is actually boosted about 36%, thanks to the effects of compounding -- and about 52% when Social Security’s inflation adjustments are added in, says Christine Fahlund, senior financial planner at T. Rowe Price."
Your expert made a mistake. The benefits are not compounded by the delay in claiming benefits. Waiting until 70 to claim benefits gets a retiree 132% of the benefits available at age 66, not 136%.
Further, the inflation adjustments are irrelevant since they affect both parties' benefits the same. An analysis ignoring inflation would yield the same results as one that considers inflation.
Posted by: Russell Settle | 08/20/2009 at 01:46 PM
Additional reasons to maybe wait until 70:
1. If a person starts collecting at 66 and continues to work, a portion of the SS is taxable if the income is over a certain level. (As much as 85% of the benefit may be taxable).
2. Waiting not only increases the individual's SS income, but it may also increase the spousal benefit.
Posted by: Joe Petti | 08/24/2009 at 08:55 AM
I am 62 and receiving S.S. of $1500. I have an ex wife of 28yrs. Divorced 10yrs.
If she files for Spousal Benefits, will it be deducted from my $1500? Also will it affect the status of my present wife when she is 62?
Posted by: Stanley Moody | 09/03/2009 at 02:14 AM