Photo credit: jb
Most discussions about the timing of Social Security filing indicate that filing for Social Security benefits as late as possible is often the best way to go. However, this is not always the case, given that by filing earlier, you’re receiving the benefit (albeit at a reduced rate) for a longer period of time. Let’s work through some examples to show how this works. This article will only deal with single individuals – we’ve covered spouse benefits in several other articles, it’s time to provide some guidance for single folks.
Example 1, Filing at 62 vs 67
John is single, age 62, and his benefit at Full Retirement Age (FRA) has been estimated at $2,000, so his benefit at age 62 would be $1,400, or 70% of the amount at FRA. If he takes the benefit now, he’ll receive $16,800 per year for the next four years. (COLAs have been eliminated in this example to keep it less confusing.)
If he is in a position where he doesn’t necessarily need the money, he could invest the funds as he receives them. If he invested those funds at a 5% fixed rate, when he reaches age 67 he’ll have a total of approximately $114,272. He’ll also continue to receive the same $16,800 year-after-year.
Now, let’s assume at this age that John needs $2,000 a month for living expenses. If he uses the current $1,400 of Social Security benefits and supplements it with his “stash” he’s built up over the previous four years, letting the remainder grow at interest, it will take twenty-three years before he’s run out of the stash account.
The problem is, once John has done that now, he’ll be stuck with an income that is $600 less (in today’s dollars) than what he needs. If he has no other resources, such as a 401(k), pension, or IRA, he’s in a pickle.
If John was somehow able to generate 6% from his savings, he’ll buy himself another four to five years, by this point taking him to age 95.
Comparing this to delaying to age 67, again assuming he didn’t need the funds prior to age 67, John has exactly the amount of funds ($2,000 per month) to cover his living expenses.
Example 2, Filing at age 62 vs 70
Same facts as Example 1, but now we’ll compare the outcome if John is able to hold off to age 70, at which point his benefit would be increased to $2,640.
Running the numbers again, upon reaching age 70, John’s savings account at 5% will have grown to approximately $185,246. Now, if John’s income requirement is still only $2,000 per month, his side account generates enough interest (at 5%) to sustain over time without depleting it. (This assumes that he is financially in a position to delay, using other sources to cover his expenses up to age 70.)
However, if John had delayed receiving his benefit to age 70 and then began using $2,000 for expenses and banking the rest in the same type of savings account, he’d still have more money in the account if he started early benefits – for nineteen years, to his age 89. From that point forward, it would be more beneficial to have waited to age 70.
Example 3, Filing at age 67 vs 70
Again, same facts, but John waits to file at Full Retirement Age (FRA), age 66, and puts the full amount of his benefit in the same savings account at 5% interest. Now, when he reaches age 70, the savings account has grown to more than $103,443.
He still only needs $2,000 to live on – and when compared to delaying up to age 70, since he is able to save a portion of the larger, full benefit, he is able to build up his savings account, but the “wait ‘til 70” account doesn’t become larger than the “file at 67” account until he reaches more than 91 years of age!
Conclusion
In these examples, which I’ll admit are far from comprehensive, we can see that longevity makes all the difference. If you live a very long life, it makes more sense to delay, assuming you can cover your expense needs in the meantime.
In many cases though, the individual cannot wait, needing the money earlier. In addition, most folks take a view that they’ll not likely live to the age needed in order to make the delay option pay off. So – all things considered, it might be better for you to file earlier, as always, depending upon your circumstances.
