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When to Start Social Security Benefits?

Do you know when you will start taking your social security benefits? You can do this starting at age 62, though many an article has been written to say you should delay until age 70 as the monthly benefit would increase by 75%. That certainly sounds very compelling, assuming you do not need the money right away to pay for living expenses. There are countless factors in determining what is right for you given your health and financial status.

Given the complicated nature, I thought it best to lay out as simple an example as possible to give you a general idea of the direction of your decision when to start receiving monthly social security benefit payments. The illustrations do not include any cost of living adjustments. The results may surprise you.

Starting Age and Monthly Benefit – The Social Security Statement you receive each year gives you 3 starting ages and their related monthly benefits. In the illustration we will use:

There are 3 illustrations:

  • Illustration A is a basic view of the total monthly benefit based on an assumed life span.

  • Illustration B is a spender view of the total monthly benefit available from Illustration A after paying income taxes on the portion of social security benefits that are taxable on your personal income tax return.

  • Illustration C is a saver view of the total monthly benefit with compounded interest from investing the Illustration B amount.

One of the unknown factors is how long will you live? For this illustration we will use 3 ages, 75, 85 and 95 years old. If we simply take a basic view in Illustration A, let’s multiply the monthly benefit times 12 months times the number of years from the starting age to the assumed age you will live until.

This clearly shows that a shorter life span to age 75 would dictate that you should start taking social security benefits as soon as possible at age 62. But what if you were to live to age 95? Then it would be best to wait to receive your monthly benefit until age 70, if you have the financial means to do so.

Your social security benefits are reported as income on your tax return. The amount that is actually taxed depends upon your income tax bracket. For purposes of Illustration B, we will assume that half of your social security benefits are taxed and that you are in the 25% tax bracket. Thus we will take the results from Illustration A above and multiply it by the after tax rate of 1 – (50% taxed x 25% tax rate). I call this the Spender illustration as it does not include any reinvestment of the benefit amounts you receive after paying taxes.

The same conclusions can be drawn from these results as in Illustration A. However due to the higher benefits received by starting at later ages, the higher the amount of taxes paid, and thus the differences narrow when comparing age 67 to age 62 and comparing age 70 to age 62 when your life span is ages 85 and 95.

Now let’s say that you do not need the monies to live on and that you will invest the after tax social security benefits. To be conservative, I use an annual rate of 3%, compounded monthly, in Illustration C. I call this the Saver illustration.

The same conclusions can be drawn from these results as in Illustration A. Though the power of interest compounding has further narrowed the differences when comparing age 67 to age 62 and comparing age 70 to age 62 when your life span is ages 85 and 95. Even though the monthly benefit is much lower starting at age 62, the Saver gets the advantage of starting compounding at an earlier age and that produces a higher relative amount at age 95 (3.5 times compared to age 75) than what the Spender in Illustration B totals by age 95 (2.5 times compared to age 75).

In looking over the results of these 3 illustrations, if you are having difficulties making ends meet and/or you are presented with a lot of health problems and your family history is also fraught with medical issues, then starting with age 62 is most likely your best option. However, If you have other sources of income and assets to live on and/or you are generally a healthy person and your family history is also unremarkable in medical terms, I find that starting at age 67 (presumed retirement age) in these illustrations may be the best way to hedge your longevity. The additional benefit of delaying the starting age from 67 to 70 years old is not a significant difference if your life span expands from age 85 to age 95.

These illustrations are meant to give you a perspective. There are probably unlimited combinations of calculations that can be done with a multitude of assumptions that would be better suited for your particular situation. I would be happy to share my Excel spreadsheet with you, so you can make all the adjustments you want. You should also speak with your investment advisor, financial planner, tax accountant and/or daily money manager to see what is best for you.


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