{"id":74,"date":"2015-02-01T09:00:00","date_gmt":"2015-02-01T15:00:00","guid":{"rendered":"http:\/\/admin.patheos.com\/blogs\/janetheactuary\/2015\/02\/when-should-you-begin-collecting-social-security-plus-a-hypothetical.html"},"modified":"2016-08-16T09:53:53","modified_gmt":"2016-08-16T15:53:53","slug":"when-should-you-begin-collecting-social-security-plus-a-hypothetical","status":"publish","type":"post","link":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2015\/02\/when-should-you-begin-collecting-social-security-plus-a-hypothetical.html","title":{"rendered":"When should you begin collecting Social Security? (plus a hypothetical)"},"content":{"rendered":"\n<\/head>

One of the pieces of advice that\u2019s floating around at the moment, with respect to retirement, is to delay collecting your Social Security benefits as long as possible. <\/p>\n

The logic here is unassailable: \u00a0even though \u201cfull retirement age\u201d has increased to age 66 for people now hitting retirement age, and will be 67 soon (year-of-birth 1960 and later), people still think of the old Social Security normal retirement age (and still the Medicare eligibility age) as \u201cRetirement Age,\u201d and think of the earliest eligibility of 62 as another reasonable choice. \u00a0But where one\u2019s check was once reduced by a reasonable-looking 20%, it\u2019s now 25%, and soon to be 30%. <\/p>\n

What\u2019s more, there is a substantial benefit to waiting until age 70. \u00a0Compared to retiring at age 62, it\u2019s a whopping 76% increase (77% for the NRA 67 group). \u00a0Compared to retiring at age 65, it\u2019s a 41%\/43% increase. \u00a0These are significant numbers.<\/p>\n

What does this mean in terms of actual benefits? \u00a0The Social Security website helpfully provides both the maximum benefits, as if a worker earned wages greater than the \u201cwage base\u201d for each of 35 years of employment, and an example<\/a> which is based on a worker with average wages (approximately $45,000). \u00a0Separately, they provide the rate <\/a>at which benefits increase for each year beyond Normal Retirement Age that one delays benefits: \u00a0for everyone born 1943 or later, benefits increase 8% per year after NRA up until age 70. \u00a0(I assume this is simple increases, rather than compounded, because I match the figures being promoted in retirement advice, but the ssa.gov site doesn\u2019t specify.)<\/p>\n

This means that for the maximum-benefit-earner, annual benefits can be as high as
Retire at age 62: \u00a0$24,300
NRA: \u00a0$32,220
Age 70: \u00a0$42,012
not reflecting adjustments for cost of living. \u00a0$42,012 doesn\u2019t look too bad, as a benefit solely from Social Security, but that\u2019s only replacing 36% of pay, at best, for these high earners. \u00a0For retirement at age 62, the rate is only 21%.<\/p>\n

For the average earner, rates look quite a bit better. \u00a0For someone with NRA = 67, we have:
Age 62: \u00a0$14,088, or 31% of pay
Age 67: \u00a0$20,126, or 45% of pay
Age 70: \u00a0$24,956, or 56% of pay
And while $25,000 isn\u2019t a spectacular income, it\u2019s a heck of a lot better than $14,000.<\/p>\n

(Note: \u00a0I threw these numbers together; they haven\u2019t been peer reviewed, or even been given much self-review.)<\/p>\n

(What if your income is somewhere in between? \u00a0That\u2019s where the benefit formula, however admirable its goal of protecting the poor, makes it considerably more difficult for people to plan their finances.)<\/p>\n

So certainly this argues in favor of continuing to work and deferring Social Security for as long as possible. It may even suggest being willing to spend down assets in order to defer starting benefits to a later age, if one is unemployed or otherwise not able to work all the way to age 70, or if one has sufficient assets and inclination to retire in any case, since Social Security offers two advantages that a 401(k) doesn\u2019t: \u00a0guaranteed lifetime benefits and a cost-of-living adjustment (though I admit I haven\u2019t done the math here).<\/p>\n

But, if one looks at the Social Security website, it\u2019s by no means easy to find information on the significance of delayed retirement. \u00a0Perhaps this is the consequence of the overall presentation of information, which is largely in the form of \u201ccalculators\u201d and in the very simplified English (at, what, the 5th grade level?) required.<\/p>\n

But, just for fun, let\u2019s consider another question:<\/p>\n

What if the benefit increases for delayed retirement didn\u2019t stop at age 70, but the 8% per year increase was an option up as high as age 75? <\/p>\n

Here\u2019s the math:
Age 71: \u00a0$26,600, or 59% of pay
Age 72: \u00a0$28,200, or 63% of pay
Age 73: \u00a0$29,800, or 66% of pay
Age 74: \u00a0$31,400, or 70% of pay
Age 75: \u00a0$33,000, or 73% of pay<\/p>\n

which are percentages which start to look pretty respectable, and much closer to the expert-recommended figures for retirement income. <\/p>\n

(Again, if your income is higher than this average, your rates will be lower \u2014 though at some point, in thinking about social policy, replacement rates aren\u2019t as important as the overall question of whether formerly middle-income people are able to maintain a life which, while it may require cutbacks, doesn\u2019t approach poverty or the financial struggles of those government categories of \u00a0\u201clow\u201d or \u201cmoderate income.\u201d)<\/p>\n

Which raises several questions:<\/p>\n

First of all, should the government remove the option to retire at age 62, considering how substantial the benefit reductions are?<\/p>\n

And, second, should the government remove the cap on benefit increases for delayed retirement, and allow for increased benefits to whatever age an individual is able to delay collecting benefits? \u00a0Or is this an \u201cunfair\u201d increase in benefit for the healthy, on the assumption that those who collect their benefits early do so for health reasons or due to unemployment, and due to no fault of their own?<\/p>\n

Postscript:<\/p>\n

Ultimately, this concept isn\u2019t that dissimilar from what retirement policy-types call \u201clongevity insurance\u201d \u2014 the concept of which is that, at a younger age, you buy a contract for a deferred-to-75 annuity. \u00a0Like car insurance, you may never need it, if you die before then. \u00a0But it insures<\/i> against your outliving your assets. at a more affordable price than buying an annuity that begins paying immediately upon retirement. <\/p>\n

How does the 8% per year simple-interest increase compare with the relative cost of purchasing annuities at a given year, vs. deferring a further year? \u00a0Would this hypothetical \u201cwait until your 401(k) is exhausted to begin collecting Social Security\u201d scenario be any different than just setting aside a pot of money to be used to buy an annuity later? \u00a0This is where my knowledge of products available in the insurance market is too limited. \u00a0But regardless, a \u201cdefer Social Security\u201d strategy is more understandable and accessible to the average consumer than purchasing annuities.<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"

One of the pieces of advice that\u2019s floating around at the moment, with respect to retirement, is to delay collecting your Social Security benefits as long as possible. The logic here is unassailable: \u00a0even though \u201cfull retirement age\u201d has increased to age 66 for people now hitting retirement age, and will be 67 soon (year-of-birth […]<\/p>\n","protected":false},"author":2209,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[450],"tags":[54],"class_list":["post-74","post","type-post","status-publish","format-standard","hentry","category-actuarial","tag-social-security"],"yoast_head":"\nWhen should you begin collecting Social Security? 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