Retirement Advice on when to Collect Social Security.

This great debate is about the optimal age to start collecting Social Security. The naive argument is for waiting as long as possible, because benefits go up as your age increases.

This analysis proves you should always take benefits as soon as you can.

Several of the most popular methods of doing the analysis are detailed below. This is the first time someone has actually crunched the numbers correctly, to prove which strategy is optimal, and put it in a place that stays put so you can evaluate it.

The truth is in the numbers, and each method shows taking benefits ASAP instead of waiting is better financially, even after considering benefits are taxed to the max from 62 to 66.

These Social Security calculators are on the TVM Financial Tools product. You can see the calculations on the money tools demo.

Here are the assumptions used in all of the calculations:

You're eligible soon (because you're almost 62), don't need the income, and have to decide between collecting "reduced benefits" this year or waiting years for "full benefits."

These PIA benefit amounts came directly from an estimate statement of an average 50 year old:
Start at age 62 and receive reduced benefits of $1,021.
Start at age 67 and receive full benefits of $1,434.
Start at age 70 and receive $1,797.

You don't need the money when you're eligible. If you take it as soon as you're eligible and spend it, then you needed it, which makes the debate moot. If you need it, then you should take it ASAP even if the analysis favored waiting because you'd make a few more bucks.

Social Security inflation COLA (Cost Of Living Allowance) is 3% annually.
The rate of return on savings/investments is 7%.
No taxes are considered on the withdrawals from the investment account.
From 62 to 66, reduced benefits are included/taxed in ordinary income at 85%.
The average tax rate is 28% on ordinary income.

Reason #1: Actuaries Ensure You Can't Win

Actuarially speaking, assuming you live to 100, the amount of money you'll get over your lifetime will be the same whether you start collecting at 62 or 72. The SSA has an army of the best actuarial nerds to assure this is so. The deal is you contributed so much money, so you'll get so much back over your life expectancy. There's no way to "win," but there is a way to lose (see Reason #2).

This is the usual answer given in the consumer-level media: "You'll get a ton more money by waiting because the longer you wait, the higher the benefit!" This reasoning can be dismissed out of hand just because it ignores inflation.

Here's an example of estimated monthly benefits for an average 50 year-old in 2010:

Start at age 62 and receive reduced benefits of $1,021
Start at age 67 and receive full benefits of $1,434, which is a 40% difference
Start at age 70 and receive $1,797, which is a 76% difference

This seems like a huge difference, but let's look at the inflation-adjusted benefits at age 67 and 70, assuming 3% Consumer Price Index inflation:

Start at age 67: $1,236, or a 21% difference
Start at age 70: $1,419, or a 39% difference

So the real difference is immediately cut in half when you account for just the average rate of inflation. As you probably know, your own personal living expense inflation has been much higher than the government's CPI. Here are the numbers at 6% inflation:

Start at age 67: $1,072, or a 5% difference
Start at age 70: $1,127, or a 10% difference

So when it comes to how much of your living expenses Social Security will actually pay for in the future, it's a lot less than expected.

Why is this always ignored by everyone that writes online/in the paper and talks on TV/radio?

Because these "financial experts" rarely crunch numbers. Most don't understand number crunching even if you hand-hold them through it. We know because we dealt with one once on a project. He is one of the top personal finance authors, and said, "I don't understand this stuff, I'm not a numbers person. Just give me the bottom line." Unbelievable! These are the people you'd expect to scrutinize every detail of every calculation.

Taking advice from a financial guru that's not a "numbers person" is like taking advice from a doctor that's clueless about diagnosing. So you can't trust them. Why they get to be on TV is because they look and sound good, not because they've done the hard work needed to get the facts needed to give meaningful advice. Our advice is to ignore them, and do your own homework.

The first scenario is a simple time value of money concept - saving it all and seeing what happens long-term. Let's look at the numbers assuming you didn't need the money at 62, but you took it anyway and saved it all at 7% (if you got an 8% taxable rate, then that's about the same as 7% non-taxable):

If you started collecting at the beginning of the year when you turned 62, then you'd have around $3,360,000 at the end of the year you turned 100. The present value of all of the payments is ~$240,000.

If you started collecting at 67, then you'd have ~$3,336,000 at 100. The present value is ~$238,000.

If you started collecting at 70, then you'd have ~$3,257,000 at 100. The present value is ~$233,000.

As you can see, you'll have the most money if you took it ASAP. The longer you wait, the less you'll have. Isn't it interesting how the actuaries did their thing to so you'd end up with almost exactly the same amount of money at age 100?

Next, let's look at the scenario of saving benefits collected from 62 to 66, and then spending benefits that started at 62 when you turn 67. In addition to the benefits, the savings are then systematically withdrawn from 67 to 100.

If you saved all of the money from 62, you'd have ~$61,000 at age 67. You'd then get an annual income of around $3,300 at age 67 from the savings. This income stream from the savings grows at 3% annually, runs out at age 100, and is added to the PIA that started at 62 (you stopped saving and started spending your benefits).

This graph shows the difference in incomes:

The blue area is above the orange area. This shows that you'd have more income if you started taking benefits at 62, saved it all, started spending the monthly benefits at 67, and then added the income stream from the savings to that.

Benefits that started at 62 plus the income stream from the savings account is more than the monthly benefit starting at 67 in all years. So if what you want is maximum income starting at 67 (or older), then waiting doesn't achieve that goal.

The following chart shows the same thing, but age 67 is changed to age 70:

You'd have more income if you received benefits at 62, and then saved rather than spent them, from 62 to 69.

So no matter how you look at it, the conclusion is the same: The actuarial nerds at the SSA have the game rigged so the amount of money you get is about the same, no matter when you start collecting it (unless Reason #2 applies).

Reason #2: You're Old, So You'll Probably Croak

The older you are, the lower the chances are that you'll see another year, especially if you're already worn out and have stress from working hard for a living.

If you decide to wait because you want the higher monthly income later, you'll probably pass away before you see any money. So you should start collecting ASAP. This is because if you do pass away, then you would not have collected any money (or a survivor gets a reduced amount).

If you take it ASAP then the money you'll have received until you pass away is money you missed out on if you decided to wait (and a survivor gets about the same). On one hand you get nothing, on the other you get something. Something is better than nothing.

A calculator was not made to show the difference in incomes if you were to croak. For example, you can just look at the age 80 row on the first two calculators. Croaking at 80 resulted in having these amounts saved:

Starting at 62: $562,000, present value: $155,000
Starting at 67: $491,000, present value: $136,000
Starting at 70: $416,000, present value: $115,000

There is also the argument that having the increased income from 62 to 67 or 70 can be used to buy better health care, which can prevent croaking. For $1,000 per month you can buy more trips to the doctor, medications, vitamin supplements, healthier food, a gym membership, and a personal trainer. Putting this money to good use even if you "don't need it," could extend your life for a decade or more.

Bottom line: Again it makes no sense to wait. Even if you don't need it, you should take benefits ASAP, and dedicate it all to a good life extension program (visit the world's best vitamin and life extension company here). If you don't, the chances of croaking before getting paid goes up every day.

Reason #3: Any Future Changes to the System Won't Be Good For You

Brilliant politicians could just continue to screw things up, and then just decide to not pay anymore. Somewhere between this drastic scenario, and their usual rosy scenario, is probably the reality - which is reduced benefits from temporary patches like "Inflation minus 1%."

This means if annual inflation (consumer CPI) is 3%, then instead of your benefits going up 3% like they do now, they're only going to go up 2%. This adds up to major bucks over the years. If this happens, then the longer you wait, the more you'll lose.

The only way to fix the disastrous imbalance in projected revenue vs. promised benefits is to cut benefits (taxes can't be increased enough because then they'd be even higher than in France). This will have to happen someday. No matter how you look at it, the forecast is for less and not more over time, so get as much as you can while you can. The longer you wait, the less you'll get.

The only levers to pull to fix the problem are to lower benefits directly, reduce the annual COLA, eliminate/increase the payroll tax income threshold, needs-test benefits, raise the tax rate, or increase retirement ages (again). Using private investment accounts is a disastrous idea (proved by the 2008 - 2009 financial debacle, this page was written in 2006), will result in less money coming in to pay your benefits, and should be avoided. None of these options will result in you getting more money by waiting.

Bottom line: Again it makes no sense to wait. You should drink the punch while it's being served because they're going to be serving less and less as time goes on.

Reason #4: A Bird in Hand is Better than Two in the Bush

Something may happen where you'd need the money. So if you waited, and then needed more money, then all you'll get is the monthly payment if you change your mind, fill out the forms, and wait for it to kick in (which could be months).

On the other hand, if you collected ASAP and saved it, then it will be there for you to tap whenever you need it.

There could also be a real war, hyperinflation, or disaster where there's no money for anyone for years, if ever. So you should take it all when you can.

Even if you spent your benefits, that means you didn't need to spend other resources, so they will be more available to tap if needed (Reason #5).

Bottom line: Again it makes no sense to wait. Take the sure thing when you can (bird in hand) even if it looks like you can get more later (two birds in the bush). The moral of the story is when you drop the bird in hand because you think you can get the two in the bush, both will get away, and then you'll have nothing. If you just let the two in the bush go, you'd at least have the one bird in hand.

Reason #5: You Can Leave Other Resources Alone Longer

By using your Social Security income as soon as it becomes available to help meet your living expenses, you can leave other income-producing investments alone to grow longer. You can also invest other sources of income instead of spending them.

The longer you can leave them alone, the more aggressive you can be, which means you can hold more of the types of asset classes that beat taxes and inflation. This means you'll make more profits, which means higher income later.

Even if the numbers showed waiting beat collecting ASAP, the amount of money gained with this would be insignificant compared to the growth of an untapped, well-balanced, investment portfolio over the five-to-eight year period.

The following charts show how much capital it would take to replace the same five, and then eight years, of Social Security income. This is then compared to having the same amount of capital that grew untouched (because you didn't need to tap it if you collect benefits at age 62):

The orange area of the chart above shows a need of ~$43,000 at age 62 to replace the after-tax income that you could have received if you started collecting benefits from 62 to 66. In other words, it shows waiting until age 67 to collect benefits, and tapping existing investments to generate the benefit income lost from 62 to 66.

The $43,000 is depleted at the end of age 66, then the difference between benefits from starting at 62 compared to starting at 67 is added back to the investment account at 67.

The blue area shows $43,000 growing at 7% tax-free untouched. This line is above the others, which means collecting ASAP beats waiting in every year.

Bottom line: Again it makes no sense to wait. If you would have taken benefits at 62 instead of 67, you would have not needed to tap $43,000. Leaving this money alone would have resulted in ~$24,000 more money at age 100 compared to tapping it.

If capital gains and dividend taxes were applied to the withdrawals of the investment account, then the difference would have been much greater (because more initial investment capital would have been needed. The more capital, the more taking benefits ASAP beats waiting, shown below).

The green area of the chart above shows a need of ~$73,000 at age 62 to replace the income you would have received if you started collecting benefits at 62. In other words, it shows waiting until age 70 to collect benefits, and tapping investments to generate the income lost from age 62 to 69. The $73,000 is depleted at the end of age 69, then the difference between benefits from starting at 62 compared to starting at 70 is added back to the investment account.

The blue area shows $73,000 growing at 7% tax-free untouched.

Bottom line: Again it makes no sense to wait. If you would have taken benefits at 62 instead of 70, you would have not needed to tap $73,000. Leaving this money alone would have resulted in ~$104,000 more money at age 100.

Conclusions

No matter how you look at it, you win on all fronts if you collect Social Security benefits ASAP, and you lose on all fronts the longer you wait. There's no scenario that results in having more money in any year by waiting (not even working and paying high ordinary income taxes on 85% of the benefits).

If you work, and your benefits are lowered, they are then raised back up later to make up for it when you reach full retirement age. So again actuarially, if you live that long, you'll still get the same amount of money. So you should collect ASAP even if you're working. A page on Social Security's website explains that.

Waiting is similar to having too much taxes withheld from your paycheck, and then getting a big refund the next year - you're just giving the government an interest-free loan and giving up the use of the money in the mean time. As you can see, the use of the money adds up to large amounts.

So our advice is to always take the "reduced benefits" the very first month you can, usually around your 62nd birthday. Survivors should start collecting at age 60.

If you have debt, then you should take it ASAP and use your benefits to pay it down.

These same concepts can also be applied to the debate over when to take pensions and annuities. It's almost never better to wait.

Miscellaneous

The spreadsheet that made these calculations/graphs is part of the TVM Financial Tools. You can see the calculations that made the charts above on the TVM demo. When you buy it, you can run your own numbers and compare scenarios.

Download the Social Security Administration's free AnyPIA benefit calculator. It's more accurate than commercial benefit calculators, so it's best not to use them.

Go to Social Security's website

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