The question “should I delay taking Social Security” isn’t a question that I will personally need to answer for at least two decades. However, I had a conversation recently that got me thinking about the mathematics behind the decision and I decided to take a look.
To better understand the tradeoffs, throughout my analysis I’ll use the example of a single male, born in 1954 who will be reaching full retirement this year (2020) at age 66. At retirement, his primary insurance amount (PIA) is $3,000/month. Let’s look at what delaying retirement could mean.
Delaying Retirement Increases Benefits
Why would you want to delay retirement? The primary reason is delaying retirement increases your retirement benefit. How so? For every full year that benefits are delayed, the benefit is increased by 8%. Delay retirement for four years, the maximum allowed? Benefits are 132% of full-retirement, or $3,960 in our example. That’s a pretty significant jump for only holding out for four more years. If you’re interested in playing with your own projected retirement dates, here’s a useful calculator.
Another reason for delaying retirement is that you aren’t done working. If you continue working while taking retirement benefits, then a portion of your social security benefits are taxable. In our example, if our retiree makes between $25k and $34k annually, he could be taxed on up to 50% of his social security benefits. If he earns more than $34k, up to 85% of his benefits could be taxable.
Life Expectancy is The Key
The question of “should I delay retirement benefits” really comes down to life expectancy. Will you live long beyond the crossover point, when the increased benefit exceeds the delayed start? Imagine it’s a race where the slower racer gets a head start. At what point does the faster racer pass the slower racer who started first?
It turns out that it’s over a decade before that faster racer can catch up. If you delay retirement just one year, it won’t be until your 78 when you finally have collected as much as the normal retiree. Delaying two years puts the crossover point at 79. The maximum deferral of four years puts the cross over sometime in your 81st year, over 15 years later. If our example retiree dies before that age, he would have come out ahead if he’d taken normal retirement.
While there’s no telling how long one will live, you can look for hints in both your health and your ancestors. Let’s say our example retiree is in moderately good health. His father died relatively early at 60, but his mother lived until she was in her mid eighties. Including one generation back, we get an average lifespan for his family history of 68 for the men and 88 for the women. Our retiree’s expected lifespan is likely in that range.
But our past might not be a good predictor of our future. Medical care has improved drastically from the early 20th century and people are living longer as a result. Another resource to use is a chart from the CDC that addresses life expectancy considering your current age. Using this chart as another rough estimate, if our example retiree was 65 in 2017 (the most recent year in the table), on average he could expect to live another 18 years, putting his expected life expectancy at age at 83 years.
Unless we find a crystal ball, that’s about as good of an answer we’re going to get. But one last thing to think about is that we tend to underestimate our own longevity when we are young. There are studies that show that folks in their forties and fifties overestimate their longevity by up to a decade.
Here’s a graph showing the crossover points:
What If I Invest My Benefit Instead of Delaying?
What if our retiree is a savvy investor and can invest 100% of his benefits with a 10% post-tax return. The first year of benefits is now worth $39.6k instead of $36k. How does that push out the crossover point?
It turns out, not much. For a one-year deferral the new crossover point is at 79 years instead of 78. For a four-year deferral, the crossover point is 85 instead of 81, a little more significant.
Maybe thoughtful investing can make a difference and cancel out the benefits of delaying retirement.
Whether to defer retirement or not depends on a lot of factors: your health, your life expectancy, and whether you plan on working while taking benefits. While I have a couple more decades to make this decision, it was nevertheless an interesting thought exercise.
Have a different opinion? Let me know in the comments.