Begin receiving Social Security too early and you may get less than you deserve

When to Begin Taking Social Security

by Rick Kahler


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"A bird in the hand is worth two in the bush." That may be good advice for pheasant hunters, but it isn't necessarily great financial advice for trying to decide when to file for Social Security benefits.

Social Security pays your full benefit amount at your full retirement age (FRA). Depending on your birth year, this is around age 65 to 67. You can choose to take a lesser amount beginning at age 62 or wait until age 70 and receive a greater amount.

Many people want to grab that bird in the hand by filing at age 62. The most common reason I hear for this choice is "Why should I wait until age 66 or 70 to collect benefits? I might not even be around by then. There are no guarantees about how long I'll live."

Obviously, knowing when we can expect to die would be really helpful in making Social Security decisions. If you are going to leave the planet at age 70, you would be ahead to start receiving your Social Security benefit at age 62. For every year you will live past 62, however, the odds increase that delaying your benefit to the FRA or even age 70 is the wiser financial decision.

Unless you have a terminal illness, you will most likely be better off to wait until age 70 to begin receiving your benefits. Here's why:

First, if you are still working between age 62 and your FRA, any earnings above the $14,160 limit will reduce your Social Security benefit by one dollar for every two dollars earned.

Second, the average monthly check you receive by waiting until age 70 is 66% more than what you receive at age 62. If your benefit at full retirement age is $1,000, at age 62, it is around $750, but if you wait until age 70, it is probably closer to $1,250. On average, if you will live 15 to 20 years past age 62, you are ahead to wait until 70 to start receiving your benefits. And if you are alive at age 62 and don't have a terminal illness, the odds are that you will live another 15 years.

Of course, Social Security benefits are also indexed to inflation. This advantage is much greater than it might appear. If inflation averages 3.5% a year, your benefit check will double in 20 years. If your initial monthly benefit at age 66 is $1,000, by the time you're 86, it will have doubled to $2,000.

Financial planner and writer Michael Kitces has pointed out another reason to delay receiving Social Security benefits. The risks and rewards of delaying benefits are not equal when you consider the break-even point. This is the age, typically 77, when your total benefit from filing at age 62 equals your total benefit from filing at age 70. He says, "While the risks of delaying benefits and dying early are limited, the upside is potentially far greater."

If you give up one year of early benefits, you risk losing that amount only if you don't live to age 77. But you receive double that one year of benefits if you live to age 83, and you triple it if you live to 89. "The penalty for not living to life expectancy is modest, while the benefit for outliving life expectancy is tremendous," Kitces says.

It's important to look at all the numbers, including your own probable life expectancy, before you decide to file at age 62. If you settle too easily for that bird in the hand, it may turn out to be a turkey.


Rick Kahler

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

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