By Joel Dansby* on Oct 17, 2020

Most people are aware that they can begin collecting their Social Security retirement payout at age 62, and, in doing so, they are informed that they will be collecting a reduced benefit. And most people also know that, the longer they wait to collect benefits, they will receive a higher monthly benefit. When they do the math, some people figure they are better off by collecting a smaller benefit for a longer period of time. Of course, some people may not have a choice but to collect early if they are forced out of work or they simply don’t have sufficient resources. But, to the extent anyone can, they should delay retirement in order to collect as high a Social Security retirement payout as they can. The difference can be substantial.

Let’s do the math together:

Delayed Retired Retirement

A worker who does not take retirement benefits at his/her full retirement age (FRA) may delay benefits until age 70 and earns Delayed Retirement Credits (DRCs) each year until retirement up to age 70 based on the chart below. 

For a worker with an FRA of age 66, the additional four years would increase the retirement benefit by 32%. The increase is based on an annual increase of 8% of the PIA if born in 1943 or later or 7.5% if born before 1943.  It is not compounded and a worker with a projected PIA of $2,000 would have his/her benefit increase by $160 each year for 4 years to total $2,640 at age 70.

Increase for Delayed Retirement

Year of Birth Yearly Rate of Increase

Monthly Rate of Increase

(Credit)

1941-1942 7.5% 5/8 of 1%
1943 or later 8.0% 2/3 of 1%

Now let’s see how the increase in benefit amounts look in a sample case of a married couple. Mr. Smith, born in 1954 and 1956 respectively are eligible for full benefits at age 66. Their monthly benefits are projected to be $1,874 for Mr. Smith and $2,281 for Mrs. Smith. This chart illustrates the increase in monthly benefits when they are delayed over the next four years.

Monthly Benefit Age 67 Age 68 Age 69 Age 70
Mr. Smith    $1,874 $2,023 $2,172 $2,322 $2,472
Mrs. Smith  $2,281 $2,463 $2,645 $2,827 $3,009

By waiting until age 70 for each of the Smiths to begin collecting their benefits, they would receive a nearly 40 percent more in retirement payout guaranteed for as long as they both shall live.

 

Of course, delaying Social Security benefits would only make sense if you are in good health and expect to at least live out your life expectancy or longer. And, it would only be appropriate if you have an income stream from a job or other sources that can bridge you to age 70.

Now let’s look at early retirement and the impact on your retirement payout

Early Retirement

Early retirees receive a reduced benefit based on a percentage, as indicated below, of the monthly benefit they would receive at full retirement age.

Early Retirement  Benefits as a Percentage of FRA Monthly Benefit

Year of Birth Age 62 Age 63 Age 64 Age 65 Age 66
1943 - 1954 75.0 80.0 86.6 93.3 100.0%
1955 74.1 79.1 85.6 92.2 98.8
1956 73.3 78.3 84.4 91.1 97.7
1957 72.5 77.5 83.3 90.0 96.6
1958 71.6 76.6 82.2 88.8 95.5
1959 70.8 75.8 81.1 87.7 94.4
1960 & Later 70.0 75.0 80.0 86.6 93.3

Note: Individuals born between 1955 and 1959 have an FRA of age 66 plus several. For individuals born 1960 or later the FRA is age 67.

On average, early Social Security recipients will receive a permanent 20 percent reduction in the monthly benefits.

Now let’s put these numbers in a retirement income planning perspective. Assuming the Smiths have targeted $75,000 a year for their retirement income lifestyle, let’s consider their timing options for collecting Social Security benefits and their impact on their ability to retire comfortably. For this example, we will assume that the Smiths have retirement savings of $350,000.

Here are the capital requirements (based on a spend-down rate of 5%) the Smiths must meet based on their decision to retire at age 62, 66 and age 70:

 

Retirement Age

Capital Requirement

Capital Shortfall based on $350,000 of savings

Age 62

$1,250,000

$900,000

Age 66

$800,000

$412,000*

Age 70

$300,000

Capital Surplus of $85,000*

*Also assumes capital growth of retirement savings over 4 years

In the Smith’s situation, by waiting, they not only benefit by an increased monthly benefit thus reducing their total capital requirement needs, they increase their capital surplus by allowing their retirement savings to grow 8 extra years.

This may not work out in the way in other situations, and there are other considerations that might warrant taking an early benefit such as:

  • You intend to collect benefits before your full retirement age and you have earned income that will not cause your Social Security benefit to be significantly reduced.
  • Due to health conditions or family history you have a less than normal life expectancy.
  • You believe your personal assets, income and retirement income sources along with a reduced Social Security benefit are adequate to meet your lifetime income need.
  • Believe their personal assets and income retirement income sources along with the reduced SSRB are adequate to meet their retirement income goals.

Important note: In situations in which there is a non-working spouse, the spouse should NOT delay filing for spousal benefits. Spousal benefits do no accrue any DCRs, so what would be received at the delayed date would be the same as the current date. By waiting, the couple would simply be losing out on 4 years of benefits.

As with any financial decision of such consequence, it is vitally important to review your options with a qualified financial professional knowledgeable in Social Security.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2020 Advisor Websites.