While you are eligible to begin collecting Social Security at the age of 62, doing so will result in a reduced monthly payment, compared to waiting until your full retirement age. Every month you delay collecting Social Security, your monthly payment increases, topping out when you reach age 70. Patience is key to many good things in life, let’s do the math to see if it’s worth the wait when it comes to collecting Social Security.
Early vs. Delayed Social Security Collection
None of us know what tomorrow holds, making the decision of when to collect your first Social Security benefit a tough one. Many looking to maximize their retirement income potential will choose to forgo receiving their benefit until they reach their full retirement age, or even later.
Before we dig in too far, it’s important to understand the basics when it comes to how Social Security works. Your Social Security benefit is based on your earnings history — those who earned more, inevitably contributed more into the Social Security pot, earning them a larger benefit come retirement time.
Collecting Social Security Early
A calculation using your earnings history and full retirement age determines your monthly benefit when you begin collecting at your full retirement age, which is currently 67-years-old. This figure is called your primary insurance amount. If you choose to start collecting early, between the ages of 62 and 66, your benefit is permanently reduced.
Here’s how the Social Security Administration calculates reduced benefits: “In the case of early retirement, a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.”
Don’t worry, you’re not the only one unable to do the mental math on that one! Here’s an example:
John was born February 1, 1962 and he wants to collect Security Security as the first chance possible.
John’s primary insurance amount is $2,000, the amount he’d receive if he waited until age 67 to collect his benefit.
He’s first eligible to collect at age 62 or 60 months before his full retirement age.
Simply put, the SSA reduces his monthly payment by 30%, which equates to a $600 per month reduction or $7,200 per year. His monthly benefit would be $1400.
If he collected at age 63 his benefit reduction would be calculated:
5/9*1%*36=20%
5/12*1%*12=5%
Total of 25% reduction
$500 per month or $6000 per year.
His monthly benefit would be $1500
There are a number of reasons an individual may choose to collect their benefit before their full retirement age. The need to pay down high-interest debt, health concerns, and losing the ability to work are a few of the top reasons people choose to begin collecting Social Security early.
Collecting At Full Retirement Age
Had John chosen to start collecting at the SSA’s prescribed full treatment age of 67, he would have received his full benefit of $2,000 per month. When you collect Social Security is a choice, you can certainly physically retire from your career before the age of 67 and delay collecting Social Security. Managing living expenses paired with other retirement savings or even a part time job are options for covering the cost of living without Social Security.
Delayed Social Security Collection
Choose to collect after you turn 67 and your benefit will increase beyond your full benefit amount, maxing out at the age of 70. For a true apples to apples comparison, John has a twin brother Mark. Mark also has a primary insurance amount of $2,000, but he chooses to cover his expenses using savings and investments.
Mark is weighing out his options and calculates what his expected monthly payment will be at the age of 68, 69 and 70:
Age 68, 12 months after full retirement age, SSA will pay 108% for primary insurance amount. Resulting in an estimated payment of: $2,160
Age 69, 24 months after full retirement age, SSA will pay 116% for primary insurance amount. Resulting in an estimated payment of: $2,320
Age 70, 36 months after full retirement age, SSA will pay 124% for primary insurance amount. Resulting in an estimated payment of: $2,480
From John collecting at age 62 and receiving $1,400 per month to Mark potentially waiting until age 70 and receiving $2,480 per month, we’ve shown a $1,000 monthly swing between collecting early and delaying benefit collection. Our hope is that we’ve clearly portrayed the importance of understanding what your expected benefit will be, so you don’t make a long term mistake.
All calculations in this article are based on 2023 data from the Social Security Administration. Calculate your own estimated benefit here: https://www.ssa.gov/oact/quickcalc/early_late.html
Long-Term Financial Planning
Because your benefit can drastically change depending on when you begin collecting, it's imperative to incorporate Social Security into your long-term retirement planning strategies. Some will make the decision based on necessity, others will carefully orchestrate a plan to maximize their monthly income. Other retirement savings, the sale of securities, dividends and interest, pension payouts, part-time jobs — there’s a lot that goes into organizing your retirement income streams.
Withdrawal strategies and managing how to utilize your retirement income is a topic for another day. Taxation, holding periods, interest rates, and market conditions are all factors to consider when determining where your money will come from each month once you’re retired. Creating a plant that maximizes your income while managing the associated expenses is in large part why retirees across Delaware partner with Integrated Wealth Management.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
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