Should you take Social Security At Age 62 or 70? It’s a difficult question to answer, but answer it you must. Today, we’ll run you through the numbers. This post will compare, by using our ACTUAL Social Security projections, the impact of taking Social Security at Age 62 vs. Age 70.
Hopefully, this will help you answer the question:
Should You Take Social Security At Age 62 or 70?
One decision which every retiree must make is when to start Social Security. While most folks traditionally start their SS at the earliest possible date, it’s encouraging to see evidence that more folks are deciding to delay. Currently, 48% of women and 42% of men start their SS at age 62, down 10% from a decade earlier (Source: The Most Popular Ages To Sign Up For Social Security).
Why are more folks deciding to delay?
I suspect folks are starting to realize that longer you delay the start of Social Security, the higher your monthly payments will be. The difference from delaying can be startling. See my statement below.Here's our actual Social Security estimate: $2,060 At Age 62 vs. $3,643 at Age 70. Is it worth waiting?? Click To Tweet
Our Social Security Statement:
Here’s a screenshot of my ACTUAL Social Security estimate, which I pulled from the ssa.gov website:
Look at the numbers – my payout at Age 70 is $1,583/month, or $19k/year higher than my payout age 62. That’s a 77% increase!! If you run the math, I’ll earn a 7.4% return for every year that I delay Social Security. Tough to beat that kind of a return in any other asset class at the moment. Even better, it’s essentially a risk-free return of 7.4%. Hmmmm. Interesting.My Social Security Payment Will Be 77% Higher If I Wait Until Age 70! Should I Wait? Click To Tweet
Let’s look further…..
Age 62 vs. Age 70 – Two Scenarios
Using the values from Social Security, I created a simple spreadsheet to compare the two scenarios.
- Scenario I: I start at Age 62 and receive $2,060 per month.
- Scenario II: I start at Age 70 and receive $3,646 per month.
From there, I increase the payout each year based on an assumed 3% annual inflation rate:
At first glance, folks may jump to the conclusion that Scenario I is the best option. Look at that Cumulative Column!! By taking SS early, you’ve earned $351k by Age 73. Delay your SS, and you’re $168k behind, with only $183k in cumulative payments.
However, there comes a point in the future where the cumulative payout in the “Start at 70” scenario catches up, and passes, the “Start at 62”.
In our case, it looks like “Break-Even Point” happens at Age 84:
For each year I live past Age 84, the benefit of delaying until Age 70 increases. For those of you who prefer pictures, here’s the same data in graph format. The Red line is the “Start At 62” scenario, the Blue is “Start at 70”:
Note that in the above analysis that if we delay until Age 70 we’ll come out with ~$258k MORE Social Security by Age 95 than if we took it at Age 62. This “benefit to delaying” continues to grow with age.
The longer you live, the better off you’ll be by delaying.
What About Taxes?
The above analysis ignores taxes (oh, a dangerous way to do an analysis….so let’s go there next).
First, Is Social Security Income Taxable?
Most Likely. But….it depends.
To keep it simple for the sake of this analysis, the answer is that Social Security is currently taxable if you’re married and your “combined income” is over $32k. To determine “Combined Income” for Social Security taxation, you add your Adjusted Gross Income + 50% of your Social Security Income. If that amount is between $32k – $44k (married), 50% of your social security income is taxed. If your Combined Income exceeds $44k, 85% of your Social Security income is taxed at your marginal tax rate. Here’s the IRS worksheet if you’d like to check if your benefits are taxable. Depending on where you live, you may also have to pay state taxes on the social security income. Read this article from Motley Fool for the details.
For the sake of this article, let’s assume that 85% of Social Security is taxed at your marginal tax rate, and you live in a state with no state income tax on Social Security.
Second, What If Future SS Income Pushes Me To A Higher Tax Bracket?
Ok, we’re going to “Graduate Level” content now. Those of you who really understand this stuff may argue that you’re better off taking your SS early. After all, if you delay, those higher payments might push you into a higher marginal tax bracket. That’s bad, right? If I can take it earlier, and at a lower tax bracket, would I be better off in the long run?
What does that look like?
Before we do that, a quick glance at the current tax brackets (subject to change, especially with current legislation in Washington):
The Worst Case Tax Scenario
To model the “worse case” impact of taxes, we’ll run a scenario where a couple pulls their SS early, while still at a 15% marginal tax rate. At Age 70, RMD’s and Social Security increase their marginal tax rate to 25%
- Scenario I: Start at Age 62 @ $2,060 per month. 15% Marginal Tax Rate until Age 70, then 25%
- Scenario II: Start at Age 70 @ $3,646 per month. 25% Marginal Tax Rate throughout
For those who prefer pictures – the same data in graphical format:
Bottom Line: Whereas the “Before Tax” analysis showed a break-even point of Age 84 (yellow boxes in the table above), the “After Tax” analysis pushes the break-even point out by 1 year, to Age 85 (red boxes). This makes sense since there’s a “bump” to scenario I with the first 8 years only being taxed @ 15% marginal tax rate.Looking at Social Security Payments AFTER-TAX moves the Break-Even point out by 1 year, to Age 85. Click To Tweet
Regardless, even in the “After-Tax” analysis, delaying the start of SS to Age 70 results in a net cumulative benefit of $185k by Age 95.
Again: The longer you live, the more sense it makes to defer the start of your Social Security. Taxes don’t change this fundamental concept of delaying Social Security.
Other Considerations For Age 62 vs. Age 70
In addition to the (not so) simple math, there are some other more “subjective” elements which you should take into consideration as you make your decision:
What If Social Security Runs Out Of Money?
Many folks worry that SS will run out of money, so they feel justified in starting payments as soon as possible:Some Folks Take Social Security Early - Best To Get It When The Gettin's Good! Or is it? Click To Tweet
Personally, I don’t expect “SS Will Run Out Of Money”, but I do suspect there will be tax changes and other “adjustments” to address the widely touted funding gap. I suspect SS payments will become increasingly “means tested”, and those who have been responsible and saved a nice nest egg will see their SS payments cut as a result.
No way to know until it happens, but I suspect I’ll never see the full payments that I see when I log into my SSA account. In our Retirement Cash Flow projection, I cut our Social Security to 75% of the levels shown in this post. Better to be conservative, in my view.
Do You Have Enough $ To Fund the 8 Year Delay
One of the primary reasons many folks start their SS at Age 62 is simple: They don’t have enough other income, and they need the money. Clearly, you need to have sufficient liquidity to fund the 8-year delay before you decide to defer your Social Security start date. While the longer term benefit may be sacrificed, there’s certainly value to many folks in getting “Less Money, But Getting It Sooner”.
Increased Sequence Of Return Risks
If you chose to delay the start of your SS, you’ll need to pull more heavily from your investments from Age 62 to Age 70. As Dirk Cotton correctly points out in this post, those heavier cash flows from your investments increase your Sequence of Return risks in your earlier retirement years. If the market tanks when you’re Age 63, will you have enough “dry powder” set aside to fund the higher required cash flow until Age 70?
Will You Die Early, Or Live To 100?
All else aside, Longevity is the biggest factor in the decision to defer. If you have longevity in your family and end up living to 100, you’ll benefit by delaying your Social Security. If you die younger (especially if it’s before your Break-Even in your mid-80’s), you’ll benefit if you start sooner. However, even if you die young, your spouse may benefit from higher spousal benefits if you’d decided to defer. No one knows when they’re going to die, but you should consider longevity as you work through your decision.
Our Decision On When To Take Social Security
Strangely, none of this analysis applies to me. I’ll only be 55 when I retire next year, so I don’t have to decide anything for another 7 years. I suspect the topic of Social Security will undergo significant change during those 7 years, and I’ll be required to conduct an entirely new analysis when I get closer to my decision point. If I’m still writing in 7 years, watch out for another post on this topic!
Therefore, this analysis is primarily for my readers who are currently making the decision (you’re welcomed, by the way!).
However, If I were forced to decide today, I’d likely decide to defer until Age 70. I have very few levers available to me to protect against longevity risk, and I’d be inclined to pull this lever as one means of minimizing my risk of living to 100. Similar to my view on longevity annuities (see my post What Role Should Annuities Play In Retirement), I like the idea of Risk Management techniques which offer me a way to minimize my risk of a long life. I plan on being around a while, and I want to make sure I protect my cash flow in my later years.
While the decision on “Should You Take Social Security At Age 62 Or 70?” is complex, the reality is fairly simple. The longer you live, the bigger your advantage of delaying the start of Social Security. Think of it as a “longevity annuity”, where you may choose to spend your “own money” from Age 62-70 in return for a higher lifetime annuity if you live past your mid-80’s.
The decision on when to start your Social Security is a ~$200k decision, as shown above. Take time to understand it, and make the decision that’s right for you.
Longevity risk (outliving your money) is one of the Top 5 Retirement Concerns and the option of delaying the start of your Social Security is a viable strategy to ensure income if you live to 100. However, make sure you factor in the other considerations outlined above before you finalize your decision.
What about you? Have you decided when you’ll start your Social Security, and why? I look forward, as always, to your comments….