Social Security Benefits: How Much Do You Really Gain by Waiting?

Source: Moodboard Photography via Flickr.

The decision of whether to take Social Security as early as possible or wait until a later date has created intense debate within the financial community, with many financial planners emphasizing the larger benefit payments you can receive by waiting beyond the early retirement age of 62. But given how complex the Social Security system is, simple rules of thumb about the best time to take benefits don't capture all the nuances involved in the decision.

In reality, each person has a unique combination of factors to consider, such as life expectancy, financial resources, and family situation. But a study from Social Security Choices provides some insight on exactly how much a typical person will gain or lose depending on when they start taking benefits, and the study's analysis sheds some light on how you can make the best decision for your own situation.

The trade-off from delaying Social Security benefits

The decision to forgo taking Social Security at your earliest opportunity involves a simple trade-off: You give up benefits permanently in exchange for larger benefits in the future. Many Social Security experts use a simple breakeven analysis that shows the age at which the total amount of cash received matches up under different scenarios.

The longer you wait, the higher your benefit. Source: Social Security Administration.

But the Social Security Choices study goes further, calculating actual rates of return as if you were actually investing the benefits you give up by waiting. Moreover, the study looks at each age separately, assessing the take-or-delay decision on a year-by-year basis. That leads to some interesting conclusions that simpler analysis can miss.

For instance, using basic assumptions about inflation and life expectancy, the study found that waiting from age 62 until age 63 before claiming benefits produces a return of 4.9% for single men and 6.2% for single women. But waiting from 63 to 64 produces a much larger return -- 7.1% for men and 8.3% for women. The reason: The reduction in Social Security benefits for claiming at age 62 versus age 63 is smaller than the reduction between 63 and 64.

Moreover, the study shows that while waiting beyond the full retirement age of 66 has benefits, you don't necessarily have to wait until the latest possible age of 70 in order to reap most or all of the gains. Overall returns are generally the highest when you wait from age 66 to age 67, and they're actually negative for men who wait from 69 to 70 -- meaning that most single men shouldn't wait, even though the extra year of delayed-retirement credits boosts their monthly payment. The reason is simple, though a bit morbid: As men get older, their shorter life expectancies mean that they don't have enough time to recoup an entire year's forgone benefits through those 8% higher monthly payments.

The big Social Security boon for spouses

Source: Social Security Administration.

Where returns really start getting impressive is when you consider some of the strategies available to married couples. In certain circumstances, taking advantage of popular strategies like the file-and-suspend method to maximize spousal benefits opens up opportunities that have much higher returns than those available to single retirees.

In one example, Social Security Choices found that waiting from 66 to 67 to claim one's own retirement benefits while using file-and-suspend led to a whopping 36.2% return. The return fell only slightly to 27.1% by waiting from 67 to 68, and further delays still saw returns in the upper teens from 69 to 70.

One thing married couples need to understand is that calculating their potential returns involves even more variables than single retirees face. Differences in ages between spouses can make some strategies impractical or reduce the potential benefits of using them, and one spouse's benefit timing decisions can have a dramatic impact on what the other spouse can receive.

Nevertheless, the general conclusion is that while many people earn more in Social Security benefits by waiting, the amount by which benefits increase isn't constant across all ages. Retirees should closely consider all the aspects of their personal situation before making a final decision on when to take their Social Security.

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