Tuesday, January 13, 2015

Social Security calculations

If you have done some reading on the subject, you no doubt know that you will need to decide at what age you wish to start drawing social security benefits, and that decision will make a significant difference on the level of your monthly benefit. Much of the available online information makes it appear that you have only three choices: begin to draw benefits at age 62, the full retirement age, or age 70. In truth, you can begin at any time between age 62 and age 70. The longer you wait, the larger your monthly benefit will be. A person whose full retirement age is 66 will find that the monthly benefit increases for each year he waits after age 62:

Age
Monthly
62
750
63
800
64
866
65
933
66
1,000
67
1,080
68
1,166
69
1,240
70
1,320

Thus, a single 62-year-old can increase his benefits by 33% by waiting until age 66, and by 76% by waiting until age 70. That decision is permanent. If he chooses to draw $800 per month at age 63, that will be his monthly benefit for the rest of his life.

Should he start at age 62 or should he wait? For some people, there is no choice. If they are not working, have health issues, or otherwise need the money now and cannot wait, they will start as soon as they can.

For those who can choose, life expectancy is a major consideration. The retiree who waits until age 66 or age 70 will catch up at a certain point, assuming he lives that long, and after that he will be ahead of the game when the total cumulative benefits are considered. The longer he lives, the further ahead he will be.

After doing some calculations, we estimate that the breakeven point, after which the retiree who waits will begin to pull ahead of the one who takes benefits early, will be:

Contrast
Breakeven
Age 66 vs. age 62
Age 76
Age 70 vs. age 66
Age 81

For the married worker whose spouse will be drawing spousal benefits, the same breakeven point applies, but the dollar difference is more pronounced because the spousal benefit is calculated as a percentage of the worker's benefit.

This SSA publication (PDF) is very informative on the subject.

See our previous entries on social security planning.