Do Good Things Really Come to Those Who Wait?

As I collect my first Social Security check this month, I have decided to really educate myself regarding this subject. I actually started becoming familiar with it some years ago, but recently stepped up my knowledge by attending classes and buying software that helps me see the results of various “what-if” scenarios. I was always told that one should delay taking his Social Security as long as possible because the longer one waited the more he would get. My question always centered around the math and the logic of waiting. A worker who has paid into the system for at least 10 years becomes eligible for Social Security at age 62. He can delay his benefit all the way to age 70, increasing his monthly check each month he waits to file between those two ages. There are a lot of rules in place that complicate the math some, but for the sake of keeping this column on topic without running too deeply into the weeds, we’ll keep our discussion only on the math of waiting to claim one’s benefit from Social Security. Need, spouse, health, they all play a part in one’s decision of when to begin one’s benefit, but the raw numbers is where we need to start when making what will become a lifelong decision.

Many Social Security recipients begin their monthly benefit as soon as possible because they have heard that Social Security is running out of money and will not be able to pay their obligations in the future. Their thinking is to get theirs while the getting is good. I recently saw a study that was conducted 50 years ago, when I was just reaching adulthood. In it the respondents, by an overwhelming majority, stated that they did not believe Social Security would still be there when they reached the age of collection. Yet here it is. Still functioning. And there are a lot more people collecting (and voting) than there was 50 years ago. I pity any politician who tries to end Social Security after people have paid into it all their lives.

But getting back to the math. So, in this case I assumed a retiree who was born after 1960 and whose Full Retirement Age is 67. I also assumed his Primary Insurance Amount (full benefit) is $2,000 a month. If he claims at age 62 he will have to take a 30% penalty, leaving him a lifelong benefit of $1,400 a month. However, if he waits to claim at age 70, he will get a 24% bonus and collect a monthly check of $2,480, plus cost of living increases, for the rest of his life. But he will have missed eight years worth of Social Security income if he files at 70 rather than 62. How long would he need to collect the higher age 70 amount ($2,480) to catch up with the amount he would have collected had he started at age 62 ($1,400)? After all, had he started at 62 he would have already collected about $150,000 (including COLA’s) by the time he reached age 70. The math tells us the cross-over is about age 81.

So I called an annuity company I sometimes do business with. They have an annuity that pays a monthly benefit that increases with inflation, sort of like what Social Security does. I asked them to figure how much, in a single lump sum, one would need to invest at age 62 to receive a $1,400 per month inflation adjusted income for life. Then I asked him to figure the same for a 67 year old collecting $2,000 a month, and a 70 year old collecting $2,480 a month. These were the results;

Age 62 individual collecting $1,400 a month - $360,718

Age 67 individual collecting $2,000 a month - $461,836

Age 70 individual collecting $2,480 a month - $537,201

That proved to me that barring any other extenuating circumstances, waiting as long as possible to collect one’s Social Security is the most mathematically smart thing to do.