The Simple Math Behind Social Security Benefits

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Should I start collecting Social Security retirement benefits as early as possible, or hold off for longer in exchange for plus-size payments?
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How much time you need to figure out the best time to take Social Security benefits can be as much of a puzzle as figuring out the actual answer, according to the recent article “The Head-Scratching Math Behind When to Claim Social Security Benefits” from Barron’s. It helps to start with the basics.

If you were born in 1960 or later, your “normal” retirement age is 67 and the payments that you can lock in if you take them at age 67 are called your “primary insurance amount,” or PIA.

You have the option to lock in smaller payments earlier—once you celebrate your 62nd birthday—or larger payments up to age 70. The amounts are calculated to rise every month. The increases are calibrated to rise as follows:

  • By 5/12ths of 1% of the PIA between 62-63
  • By 5/9ths of 1% of the PIA between 63-66
  • By 2/3rds of 1% of the PIA between 66-70.

It is that simple. The actuaries and economists have done all the work. These numbers have been in place since 1983. The only question is, can you figure out what’s best for your personal situation and avoid making the wrong choice?

It is important to understand that even people who study these numbers come to different opinions, because the answers are based in part on when you will die and how your investments will do in the future.

However, for anyone approaching their 62nd birthday, here are some insights. A male who delays until age 70 receives a real compounded return of 3.2% a year. A female will receive a compounded return of 4%, because women tend to live longer. For couples, the increase is 5.2% because of spousal benefits, as payments last the longer of the two lives.

Compare these returns with any other investment that provides inflation-adjusted returns backed by the U.S. government. Even 10-year Treasury Inflation-Protected securities (known as TIPS) right now yield less than zero: -1%.

The general answer is that delaying payments is the best bet, unless the income is needed, or someone has a terminal illness. For couples where one earns much more than the other, the lower earner might want to take their benefit early, knowing that it will eventually be replaced by spousal benefits on the higher income of the higher earning spouse.

Claiming benefits late reduces longevity risk—the chances that you’ll outlive your savings. However, it prevents the risk that you won’t max out your benefits. If that happens and you have life insurance, at least your heirs will be sure of receiving those proceeds.

Reference: Barron’s (Sep. 4, 2020) “The Head-Scratching Math Behind When to Claim Social Security Benefits”