Taking Social Security Early

The most common question I get about Social Security is, “Will it really be there when I retire?”. My answer is a resounding yes. Social Security is the most popular US government program. Almost 90% of Americans over age 65 receive Social Security benefits.

Social Security benefits replace about 40% of pre-retirement income on average. However, the Social Security Administration estimates that 21% of married couples and 44% of single retirees rely on Social Security for over 90% of their income. Social Security lifts 15 million elderly Americans out of poverty. Even high earning professionals with substantial retirement savings rely on Social Security to maintain their standard of living.

Did you know that 57% of Social Security recipients take benefits before reaching full retirement age? This means they are accepting a permanently reduced benefit for life. The earliest a retiree can start taking Social Security is age 62, and 34.3% of recipients claim at this age. Their monthly benefit is reduced by 30% for a retiree whose full retirement age is 67. By taking Social Security at age 63, their benefit is reduced by 25%, at 64 by 20%, at 65 by 13.%, and age 66 by 6.7%. It is important to remember that these reductions are permanent. Future cost of living adjustments will be based on the lower monthly amount. This lifetime reduction in benefits can be substantial. 

Full retirement age ranges from 65 for those born in 1937 or earlier to 67 for those born in 1960 or later. Here’s a chart showing Full Retirement Age by birth year.

Social Security Full Retirement Age

Source: https://www.ssa.gov/planners/retire/retirechart.html

On the flip side, if a retiree waits until age 70, benefits increase 8% each year between FRA and age 70. This results in a much larger monthly benefit, which can be beneficial for those who live to age 80 or longer. This increase is one of the smaller provisions I could see getting the ax in future Social Security reform bills. In a low interest rate environment, there are not many places one can find a guaranteed increase of 8% per year. 

Here’s is an example of the potential cost of taking Social Security benefits early. Theresa is 57 years old. Her Full Retirement Age is 67 because she was born after 1960. She has been a high earning professional and paid the maximum in Social Security payroll tax for most of her career. Here are the estimates for her monthly benefit if she claims at different ages:

Assumes life expectancy of 93 and COLA (cost of living adjustments) of 2.6% per year

As you can see, Theresa stands to lose almost $175,000 in lifetime benefits by filing at age 62 instead of her full retirement age. She could gain an additional $105,000 in lifetime benefits by waiting to age 70 to file. Take a look at the middle column, Annual Benefit. Now imagine this is your starting salary for a 30 year career. Which one would you choose? The benefits of delaying make a huge difference later in life.

After reviewing this analysis, everyone still asks me, “but what about the years to breakeven?”. In this example, Theresa “breaks even” for waiting until her Full Retirement Age, by living to age 76. This is not a stretch for a woman age 57 today. Her actuarial life expectancy is 93. Rather than stress about breaking even, I encourage retirees to consider to more likely scenario, living longer.

The decision of when to start taking Social Security  is complicated. Current health status should be weighed against the chances of living a normal life expectancy. In some cases, it might make sense to file early, but for most retirees, the benefits of waiting to at least Full Retirement Age can make a world of difference later in life. 

I covered this topic on today’s Market Moment on Instagram. Follow along @ritholtzwealth for weekday updates on popular financial planning topics.




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