We’ve all gotten our paystub at the end of the month and saw the total amount withheld for Social Security tax and dreamed of the day we will see that money again. However, trying to decide the best time to begin taking Social Security distributions can be difficult because it depends on multiple factors beyond just financial circumstances.
What age can you receive benefits?
You do have the choice to begin receiving benefits at 62; however, the payment will be at a heavily discounted rate. By delaying receiving Social Security checks until 67, you’ll receive around 30% more, excluding any cost of living increases. If you are willing to bet on your longevity and decide to defer receiving benefits until 70, you will receive around 32% more than your Full Retirement stipend for the rest of your life. At the maximum amount of benefit, this could mean nearly $1,000 extra every month in your pocket.
Here’s the question: Should you take your benefits as soon as possible or hold out longer?
While individuals can begin receiving discounted Social Security retirement benefits as early as 62-years old, for individuals born after 1938, the age for Full Retirement increases until age 67 for individuals born after 1958 as shown below.
Full Retirement by Birth Year:
| Year of Birth | Full Retirement Age |
| 1937 or earlier | 65 |
| 1938 | 65 and 2 months |
| 1939 | 65 and 4 months |
| 1940 | 65 and 6 months |
| 1941 | 65 and 8 months |
| 1942 | 65 and 10 months |
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or later | 67 |
While there may be certain instances that we will discuss where it may be more advantageous to begin taking Social Security prior to Full Retirement, if you do elect to begin receiving benefits, it will come at a discounted amount of around 5-6% compounded for each year prior to Full Retirement. Because your benefit is guaranteed by the U.S. government, simply waiting 5 years is similar to investing in an investment with a guaranteed rate of return of 5-6% per year. Waiting another 3 years until age 70, you would receive an increased risk-free compounded return of 7-8% per year during the period.
For reference, the current 5-year Treasury Bill interest rate which represents the risk-free (guaranteed) borrowing rate trades at around 2.2%. In essence, you are receiving an extra 4-6% risk-free return on your money that is compounded annually by simply delaying benefits until 67 or 70.
Reduction If Your Full Retirement begins at 67:
| Year Begin Taking Social Security | Estimated Reduction Percentage |
| 62 | 30% |
| 63 | 25% |
| 64 | 20% |
| 65 | 13.3% |
| 66 | 6.7% |
Overview of Social Security benefits
The goal of determining the most opportune time to begin receiving benefits should be to maximize the total amount received from the government over the course of their remaining life.
There are two main drivers that will affect your lifetime distributions: amount of benefit you receive each year and number of years receiving the benefit.
Generally, the longer you live, the later you would want to wait to begin taking Social Security to maximize your benefits. For most people, if they will live into their 80s, they are better off waiting until 67 or even until 70.
The amount of annual benefit is ultimately determined by the guidelines set out by the Social Security Administration (SSA). However, since there is the option to begin receiving benefits early at 62, you will need to decide whether your personal circumstances may require you to begin receiving benefits of a lesser amount or if you have the financial viability to delay and receive the higher amount.
The second aspect relates to the number of years receiving the benefit which is a combination of when benefits begin and when the retiree deceases.
Let’s look at an example to understand the impact from a mathematical perspective.
A 62-year old that is eligible for the maximum benefit of $2,860 per month is contemplating on whether to begin taking their benefit now or deferring until they would receive full retirement benefits. If they elect to begin receiving Social Security now, they would receive around $2,000 per month.
Why would anyone take $2,000 per month now when they could wait 5 or even 8 years and receive $2,860 or $3,775 per month?
The main variability that would determine if taking benefits early would be best would be if you could somehow know when you were going to die. However, this is pretty much impossible other than extreme cases such as terminal illnesses. Ideally, you should look to receive as much money as possible for as long as possible. The trick is finding that sweet spot.
When to delay your benefits
The bottom line is if you will be living well into your 80s or 90s and plan on spending all of your Social Security checks to survive rather than investing the early benefits, you will get the most “bang for your buck” by delaying until 67 or 70.
You have a reasonable expectation that you will live past age 80
In fact, the breakeven point where the cumulative amount of benefits is the same for taking discounted benefits at 62 and waiting until Full Retirement at 67 is around age 78. This means that for every year you live past 78, you will receive over an extra $10,000 per year to spend as you please simply by waiting.
If you are willing to bet on your longevity and defer benefits until 70, you’ll only need to collect Social Security for one additional year to make up the difference. At age 78, you will have collected all of the benefits you would have if you had begun taking them at 62 or 67. Every year you live past 78, you will collect nearly $11,000 more than if you had started receiving benefits at 67 and nearly $21,300 each year compared to early retirement.
These dollars may be invaluable as you age since much of your retirement nest egg may have been spent when you were more active, had any remaining debt or costly expenses, or spent money on hobbies and travel. Ultimately, if you live another 10, 20, or 30 years thanks to modern medicine, this could result in hundreds of thousands of additional dollars to take care of your financial needs when you are no longer able to work even part time due to your age or illness.
You do not need the money right now
Another reason to delay benefits is you are healthy and simply do not need the money today. Perhaps, you are still working and earning an income, have accumulated a series of passive income sources, have paid off your mortgage and other consumer debt, or have substantial retirement savings that can sustain you and your family indefinitely.
By exhibiting patience and self-control, you have the ability to substantially increase your benefits at a compounded risk-free rate of nearly 6% or more if you delay receiving them until 70.
Just from living off of other income sources, you will have a higher payment coming into your bank account each and every month for the rest of your life – regardless of how your other investments perform or if you are able to work later in life.
When to take your benefits earlier
Illness, disease, or lifestyle factors may suggest you will not live long past 80
Alternatively, certain life circumstances may steer you towards taking benefits as soon as possible. If your life expectancy may not be optimistic because of family history of premature death, health deterioration, or your personal lifestyle choices may prohibit you from living well into your 80s, choosing to take your benefits earlier may be the best option in order to maximize your total benefits received.
While you will receive a discounted benefit, you could still come out ahead over the next 10-15 years if your health has drastically deteriorated, you have higher-risk disease or illness, or other evidence suggests you may not live past age 80.
Even if you do not need the money but believe it is more than likely you would be better off receiving the money today, you could instead invest that money just in case you live longer than expected or for future generations in order to leave a legacy for your family.
You have a lot of high-interest debt
Aside from health circumstances that could lead to premature death, certain financial circumstances could mean you are better off taking early benefits.
For instance, if you have a substantial amount of high-interest consumer debt such as credit cards balances, student loans for yourself or children, or vehicle loans that are costing you more than 6% in interest per year, you may be better off taking your benefit early and using 100% of Social Security to pay off these debts.
Since you can’t escape debt in retirement, it could be worthwhile to take the benefits while working as long as you do not use the money for lifestyle expenses and commit to taking the steps necessary to secure a payment-free retirement. However, keep in mind any tax implications because if you do elect to receive your benefit while earning a taxable income, up to 85% of your Social Security benefit could be subject to federal income tax if your taxable income is more than $34,000 as an individual or $44,000 as a couple in 2019.
Because of the tax implications, it may be best to use your income to payoff high-interest debt first and delay benefits until you are no longer earning an income that puts you in a higher tax bracket.
As an example, let’s say you are working full time and your household taxable income results in an effective federal tax rate of 25% and you elect to receive early Social Security retirement at 62 to help pay off credit card balances that have a 25% interest rate. While you will receive an additional $2,000 per month to put towards high-interest debt, you would end up paying around $5,100 in taxes on the $24,000 you received because your household income is well about $44,000 if you have an effective tax rate of 25%. Therefore, 85% of your benefit ($20,400) would be taxable at 25%. While you would still have $18,900 you could use to pay off debt, the taxes you paid of 21% on your benefits would offset any interest savings on the debt and would not be worth the election to receive early retirement. Coupled with the fact that you receive only about 70% of the benefit you would receive by waiting until 67, this decision to take early retirement while continuing to earn a substantial income may not be worthwhile.
Alternatively, let’s assume you are 62-years old, married, semi-retired and have a taxable income of $45,000 per year and elect to receive your benefit. A married couple filing jointly that has a taxable income of $45,000 would have an effective tax rate of around 11% for 2019. If you were to elect receiving benefits, because of the lower tax rate applied to 85% of the Social Security benefit, the effective taxes on Social Security would be under 10%. If you had substantial debt with an interest rate of 20%+, it may be worthwhile to take early benefits, pay the taxes, and plow the money into paying off the high interest debt in order to greatly reduce your financial stressors.
You need the income now
Another reason to consider receiving early benefits is because you need the money now in order to survive. Perhaps, you do not have other retirement savings that is producing income, or you have experienced a job loss in your early 60s and no longer have income to pay your bills and eat. Receiving the benefits early out of necessity could be a valid circumstance where the pure dollars and cents take less precedence over using the money to scrape by.
While taking a reduced monthly payment may not be the best financial move longer-term, some circumstances are certainly unavoidable and may mean you are in a situation to take early benefits despite these consequences.
Ideally, you could find another temporary job to hold you over several more years until your benefits will be substantially higher. By continuing to earn an income to survive and delaying until full retirement age, you will have a much better chance of being able to make it on Social Security later in life as you age and cannot physically work.
You have investments that will earn substantially more than 6%
While there is no investment outside of U.S. Treasury Bills that is risk-free, if you believe you have the ability to earn substantially more than the risk-free 5-6% rate of return you could get from delaying Social Security from 62 to 67, taking the benefits early and investing the payments could be a worthwhile consideration.
While the S&P 500 or market as a whole has had an average rate of return of 10% over the last several decades, over a 5-year span, there is no guarantee you will earn more than the 5-6% extra you would gain from simply waiting.
However, if you do have investment opportunities that you believe will earn 10%+, taking early Social Security and plowing that cash into these projects or funds could be worthwhile. As an example, if you have rental property that is consistently generating cash on cash returns of 10%+ and a total internal rate of return of 20%+, using this money to accumulate more similar properties or investing in rehab projects could be a smart move if it yields a much greater return. As another example, if you have built substantial wealth and are investing for future generations, you could invest in high-growth stock funds that have beaten the market consistently. While there may be more volatility, the risk could be worth the greater returns – especially, if you do not have a need to rely on any of your Social Security benefits for your own consumption. However, do keep in mind any tax implications that may arise if you have earned income during this time as this could affect the equation of whether you should wait or invest the benefits today.