Deciding When to Take Social Security

Aunt Etta And I in Greece.

This is a controversial topic that I believe has no controversy for the high-income earner. Beginning to take your Social Security payments before your designated full-retirement age—for me that’s 67—will result in a lower monthly payment. Waiting until later, such as at age 70, will increase your monthly payments, but you lose out on all the money you could have taken for the prior years—an opportunity cost.

This question is similar to the choice of going to medical school versus starting to work right out of college. If you start work right out of college, you will have a lower income. If you go to medical school and residency, your income will likely be greater, but you don’t start it for another seven to twelve years. You will not only miss out on the income all those years, but you will also be paying interest on the money you borrowed to get through school. It is a trade-off that is easier to make when you are young and likely have many years ahead.

When you reach retirement age, your risk of dying in any given year is climbing. So your chances of collecting that higher Social Security payment long enough to surpass the earlier payment drops each year. If you think of this as a linear equation involving the money collected, the breakeven point is around age 79. If you will live beyond that, you are better off waiting until you are 70 to collect Social Security. If you don’t believe you will make it to 79, then start collecting at 62. The reality is, you don’t know how long you will live.

When you calculate how my benefits play out by starting Social Security withdrawals at age 62 ($1,868 per month), 67 ($2,818 per month), and 70 ($3,511 per month) according to the information sent to me by the Social Security Administration, you will often hear this advice, “If you don’t need the money to live on, wait until age 70 and draw the larger number.” But if you don’t need the money, you could invest it rather than spend it if you were to take it early. That means you should be taking into account the interest accruing on each of the three choices.

If I were to begin taking my $1,868 a month at age 62, and I am living off my retirement funds at that time, I can now leave $1,868 a month in the retirement account and let it continue to grow while I use my Social Security payments to live on. Thus the overall return on my retirement plan will effectively apply to the Social Security payments. With this in mind, the calculations take on a whole new outlook. This also leaves out the effects of avoiding any taxes the retirement plan money might require to be paid. Older people may not have a Roth alternative available in their plan and will be paying taxes on the withdrawals. Younger people should have a considerable portion in Roth accounts and no taxes enter the equation. So for this example, we leave out the taxes and just look at the effect interest will have on the decision.

Interest accumulation changes everything, since at 6% interest, I will be 90 years old before I would do better by waiting to take my money until age 70. Not very many people live to age 90, and most will be able to average better than 6% return over the long haul. At an 8% return or higher, no one has lived long enough to benefit from waiting until age 70 to begin the withdrawal since Noah’s time.

So even if you don’t need the money, take it as soon as possible and use it to avoid pulling money out of your retirement plans. You will be better off financially for the choice. If you do need the money, the question is moot. The only reason for a doctor to delay taking Social Security is to still be working. There are penalties to taking Social Security payments while you are still working, if you do so before you reach full retirement age. As soon as the penalty no longer applies, take the money and invest it.

If you are looking for other useful information for your retirement planning, or would like to see the graphs of these figures, check out my new book “The Doctors Guide to Smart Career Alternatives and Retirement.” It was written for the doctor who feels like they are ready for a big career change or retirement.

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12 thoughts on “Deciding When to Take Social Security”

  1. It’s simple!

    It’s your money. Start taking at 62yrs.
    You may not live to 67 or 70
    You put that money there.
    Take it. Spend it. Invest it. It’s yours

    • Delaying taking SS gives you a 8% yearly increase from government guarantee plus inflation adjusted increases. No brainer better than risking investing yourself.

  2. Like WCI, I prefer to wait until 70 to claim social security.

    It’s difficult to get a guaranteed, safe, 8% return per year. I therefore think of social security as functioning as a bond in my portfolio. That allows me to keep more of my retirement money in higher performing equity versus lower performing but safer bonds. I also want to do Roth IRA conversions and don’t want the extra taxes of social security until 70. I and my husband have huge 401-k, 403-b and solo 401-k balances and would prefer to draw off some of these funds to decrease taxes on future RMD prior to getting social security.

    Of course, everyone’s situation is different. But for those of us with large taxable accounts available to use for Roth IRA conversions, as well as large tax deferred accounts, I think waiting to claim social security could be advantageous. Those in poor health, might still be better claiming social security earlier, despite large pre tax balances.

    • RocDoc, be sure you don’t confuse waiting to take social security as the same as getting a guaranteed 8% return on an investment. It is not the same. When you wait for social security your monthly check when you start getting it will be 8% higher for each year you delay, that is true. But that is not the same as investing and getting an 8% return. I covered this in greater detail in my retirement book. You need to compare apples to apples. For example, if doctor A starts taking social security at age 62 and would get $1,868/month, and Dr. B waits until age 70 to collect $3,511/month instead, then Dr. A will have collected $160,128 before Dr. B gets his first $3,511 check. If Dr. A didn’t need the money then he also would have the interest it earned as well. Since Dr. A has $160,128 + interest, Dr. B will not have what would have been generated by an 8% return on an investment. What he has is a larger monthly check that didn’t start for 8 years. Some people will wait to get a larger check and others will instead take a head start in the race and run a little slower. If you want the longer discussion with some graphs as well, read the chapter about it in my retirement book. This article was a short look at that chapter. You are right, everyone will have a bit of a different situation. Hopefully we will all check out the options and chose the one that will be best for us. Thanks for your comment.

  3. I was incorrect in thinking that if my wife takes SS at age 62 that she would jump to 1/2 of mine based on the spousal benefit once I start at FRA. Running our Social Security numbers thru makes me still think our plan is she takes her’s at 62 and me 66.8.

  4. Great post and something all retirees need to figure out. At this time we plan on my wife taking hers at 62 on her work history and I wait until Full Retirement age 66.7. She will jump to 1/2 my benefit on the spouse benefit. The idea is if one of us passes the other will at least get my higher SS amount. We are a couple years out for any of this and things can change. I may recalculate if RMD rules change as being hinted or if there any changes to SS.

  5. Totally disagree and I think you blew this one for a handful of reasons
    1. Risk adjustment on returns
    2. Value of the longevity insurance aspect of SS
    3. Value of longevity insurance aspect for your spouse
    4. Ability to do arithmetic conversions for longer
    5. Actuarial calculations actually favor holding off, particularly for someone who understands healthy living
    6. Less need for a spia

    I bet I can come up with a few more with some time to think about it.

    If you really feel this way, I think it’d make a good Pro/Con post

    • WCI,
      This is why they have horse races. The timing of when to take social security is one area that you and I have a different opinion. We are of like mind and almost always agree on financial issues from what I read on your blog and in your book, but here is one of the rare places where we differ. When two financial teachers disagree on a topic, it does make a good pro/con article. This is also another example of where math can be fuzzy since there are many assumptions to be made and math is not geared for assumption but for absolutes. Change a few assumptions and you get a different answer.


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