Permanent Value

Maximizing Social Security Benefits

Nathaniel Ritchison
January 13th, 2010

No matter what age you are you’ve probably considered the question, when should I begin taking my social security benefits? This question has become especially timely given the financial reformations that are sweeping through the health care industry and Medicare, and will likely include Social Security in the future. It appears that most retirees are applying sooner rather than later with the applications for retirement benefits skyrocketing by 23% this past year. Who can blame them? Most Americans are applying for benefits as soon as they become eligible in fear that legislation will reduce their benefit in the future. However, once we look at the facts, you may not want to run to apply for your retirement benefit the day you turn 62. Consider these important factors before applying for your retirement benefit: your retirement age, your retirement income plan, and your life expectancy.


-Retirement Age-

Let me start off by saying that if your financial plan is dependent on you receiving your benefits as soon as possible for food, shelter, or health care in retirement, you’re probably not in a situation to do any further analysis, you will need to begin as soon as possible. If, however, your plan allows for some flexibility, you need to consider the trade-off between receiving your benefits early, at age 62, and delaying it to future years.

Uncle Sam will handsomely reward you if, through designing and implementing a sound financial plan, you’re able to delay receiving benefits. Let me illustrate the difference in benefits with an example. Say you were born in 1948, your full retirement age would be 66. If you file for your retirement benefit at age 62, your benefit would be reduced to 75% of your full benefit. For every month after age 62 you delay receiving your benefit, your benefit goes up by a fraction of a percent until you receive 100% of your full benefit at age 66. But…if you wait until age 70 your benefit goes up to 132% of your benefit at age 66. Now I recognize I haven’t taken the time value of money into account or the cost of living increases for your benefits, but an 8% annual increase in your benefits after age 66 is a high hurdle rate that would be difficult to argue against.

-Retirement Income Plan-

Another important factor to consider is the effect that earned income has on your social security benefit. If you elected to receive benefits before your full retirement age of 66 in the above example, your retirement benefit could be reduced by $1 for every $2 that you make over $14,160 until you turn 66. For instance, if you received $24,000 per year in benefits while earning $24,000 per year in income, your social security benefit would be reduced by $4,920 per year. That’s a sizable chunk, especially if you consider that there is no reduction of benefits after your full retirement age of 66. That’s a particularly dangerous trap for those that are planning on applying for benefits before their full retirement date and working part-time to supplement their income. Another potential benefit of working longer is that the Social Security Administration considers the last 35 years of earnings to calculate your benefit. If you continue to work full-time up to your full retirement, you have an opportunity to replace those low earning years with higher earning years.

-Life Expectancy-

GraphFinally, the most difficult factor to consider, but important nonetheless, is your estimated life expectancy. Let me demonstrate this effect by using the above example once again. Take a look at this graph.  If your full retirement benefit at age 66 is $2,000 per month, that means your early benefit at 62 is $1,500 and your benefit at age 70 is $2,640. If after considering your family history and current health, you decide that you are reasonably sure that you’ll live to age 90 the cumulative difference in benefits are dramatic. If you begin your reduced benefit at age 62, at age 90 you will have received $522,000. By waiting until your full retirement at age 66, you’ll receive $600,000 in payments. But if you are able to delay your benefit until age 70, you will have received $665,280 in benefits by age 90!

The results speak for themselves. The longer you delay receiving your benefit and the longer you live, the more that you’ll be able to receive from the social security system. But like any financial decision there are many different scenarios and factors to consider. If you don’t know how your social security benefits fit into your overall financial plan, contact our office and we’ll help bring you clarity over this important decision.