Deciding at what age to claim Social Security benefits may be the single most important retirement money decision of your life. Claim too early, and you lock in a lifetime of monthly payments that may be far lower than if you wait. Claim too late, and you may spend years living on an austere budget that saps you and your quality of life. Waiting to claim can also leave a lot of money on the table—your money—should you die in your 60s or even 70s.
Doug Lemons, a retired Social Security Administration executive, produced a comparative analysis for the Journal of Financial Planning of three different ages at which many people consider taking Social Security. These are:
1. Age 62, the earliest age people can claim benefits
2. Age 66, known as "full retirement age" for people born between 1943 and 1954
3. Age 70, the claiming age at which people become entitled to their maximum monthly Social Security payments. Waiting longer does not increase payments.
The key things to keep in mind for these three claiming ages is that someone who claims at 62 will receive benefits equal to only 75 percent of what they'd get if they wait until their full retirement age. And someone who waits until they turn 70 to claim will receive 132 percent as much as they would get by claiming at age 66. Also, thanks to the program's annual cost of living adjustment (COLA), all benefit payments are guaranteed to rise to keep up with inflation.
Lemons then compares two sets of claiming ages—62 versus 66, and 66 versus 70. As he stresses, making any comparisons here is very complicated. First, the calculations depend on many unknowns, beginning with future rates of inflation and investment returns. Vary either of these projections by even a little, and the calculations can change a lot.
People who decide to claim benefits early at age 62 often decide to do this because they feel they have no choice and need the money to pay basic living expenses. Lemons's comparisons, by contrast, assume people take those early benefits and invest them. It's the only way he can set up an apples-to-apples comparison with different claiming ages.
In the comparison between a person claiming at 62 and at 66, he assumes the early claimant invests the money for four years, producing a tidy sum by the time he or she turns 66. Because that early benefit is only 75 percent as much as it will be at age 66, the break-even point depends on how long it takes the higher payments that begin at 66 to be invested and produce a nest egg that's the same size as the one generated by payments—plus investment gains—that began at age 62. He then does the same thing in a comparison of benefits beginning at age 66 and age 70.
Besides future rates of inflation and investment returns, Lemons also looks at claimants' federal income-tax brackets and at the percentage of their Social Security benefits that are subject to federal income taxes. This varies from zero for people in the lowest 10 percent federal tax bracket, to 50 percent for those in the 15 percent bracket, to 85 percent for people in all higher tax brackets. No more than 85 percent of Social Security benefits are taxable, regardless of income levels.
When the dust has cleared from Lemons's calculations, a person claiming early benefits in March 2011 and one not claiming until age 66 in March 2015 would have the same amounts of money 16 years and eight months after the 66-year-old's benefits began. That amounts to age 82 and eight months for both claimants; before this age, the 62-year-old claimant comes out "ahead" by filing early. At older ages, the person who waits until full retirement age to claim would come out ahead.
This is an average. Depending on taxes, inflation, and investment returns, the range of break-even ages goes from 81 to 86 1/2. There is a similar range of break-even ages in the comparison of benefits begun at age 66 to age 70—from the age of 84 to nearly 87.
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While these comparisons are relatively straightforward for one person's benefits, Social Security benefits often involve a spouse and family members, too. Lemons doesn't know, of course, what your family situation is like. But he does emphasize that people need to factor in spousal benefits and survivor benefits to a spouse and non-adult children to do their own comparisons.
For these reasons, people should consider hiring a trained Social Security claiming expert to assist them in their claiming decision. You may think you know enough basic information about the program to make a sound decision, but many seniors have been unpleasantly surprised to learn they could have, and should have, made smarter decisions about when to claim their benefits.