Very few people (about 5%) actually wait until their Full Retirement Age to collect benefits. Why is that?

Well, the most obvious reason is that if you need the income to live on, you don’t have much choice but to start benefits.

For people who have a little more comfortable situation and have been able to save for retirement, their reasons are different. A pretty popular reason is that people want to get out what they paid in. They figure that if they had to pay taxes all those years, they want to start getting some of that money back as soon as possible. Adding on to that, many retirees are worried about potential legislative changes to Social Security that could cut their benefits.

Well, in the past and up to this point, most politicians have shown no interest in cutting benefits to retirees who are already eligible to collect benefits. Proposed benefit cuts are almost always placed on workers who won’t receive benefits any time soon. So it doesn’t seem like a big risk that by itself should cause you to take benefits early. But you can’t completely rule out the possibility either.

Here’s another factor that is not really a reason for starting early, but makes the point that starting early isn’t necessarily any better or worse than starting later. This is called actuarial equivalence. What it means is that the Social Security Administration calculates the benefit amounts based on an assumption of how long you’ll live. The idea is that you have a particular life expectancy at age 62. In theory, if you live until exactly that life expectancy age, your total benefits over the years will be the same no matter when you actually decide to collect benefits. For example, using the data from the chart below (and discussed in an earlier blog article), starting at age 62 means you’ll have collected 8 years of benefits before the age 70 starter has collected a single dollar. From that point on, the age 70 starter earns $570 more per month, but since he or she started so much later, it takes 11 years for the higher payments to catch up to the early starter. So that’s age 81, which is in the ballpark of your life expectancy at age 62.
 

So that’s not really something that favors taking your payments early, but it’s good to know that no matter what age you start, the payments are relatively fair over time. Of course, your personal life expectancy may not match up with the average retiree. If you think you’ll outlive the average, then it might make sense to delay payments. If not, it might make sense to start as early as possible.

If you’re worried about outliving your assets, think carefully about when you want to start to collect benefits. Outliving your assets is generally a problem of longevity – you live longer than you would have expected. While this is certainly positive, it does increase your financial risk. Since Social Security provides an inflation-adjusted income stream for the rest of your life, it can play a very important role in reducing that risk. Delaying benefits will increase that lifetime stream of income if you live well past your life expectancy, but you are trading this for not having any benefits in the meantime. There’s not necessarily a right or wrong answer, but you should weigh your preferences for having more money today vs. reducing the chance of running out of money years from now.

 

Note: This blog article is one of a series related to Social Security Benefits. Please also review the companion video (or just the slideshow) for a more expansive review.