Timing Social Security benefits

Collect at 62 or wait for a higher monthly payment? The recession may force your hand. But if you have a choice on when to start your checks, here's how to decide.

Last reviewed: December 2009

At what age should you start collecting your Social Security benefits? The law allows you to begin collecting at your 62nd birthday, though you'll get a larger amount per month if you wait. So if you're nearing retirement you have to weigh your choices: Is it better to have a regular monthly income stream right away, or wait to collect bigger monthly checks later?

The Social Security Administration defines "full retirement age" as the point at which you're eligible to collect 100 percent of the monthly benefit you've earned over your lifetime of work. If you were born in 1943 or after, that's between 66 and 67, depending on your year of birth. You don't have to start collecting checks at that point, though. You can put it off until age 70, when you'll reach your maximum benefit.

Breaking even

Two-thirds of Americans take their monthly benefit before their full retirement age, according to the SSA. But the trade-off for receiving earlier benefits is a reduction in the monthly benefit check you receive for the rest of your life. For example, if you were born in 1948 and decide to receive benefits at age 62, you'll get 25 percent less each month than if you wait until age 66. Fewer than 10 percent of Social Security beneficiaries hold off collecting until age 70. But those who do are rewarded—benefits at that point are 32 percent greater than the amount collected at full retirement age.

So which route will be best for you? Obviously, the variables in making this decision are numerous and personal—your health, likely longevity, financial situation, and marital status—not to mention other unknowns, such as how health-care reform and future Social Security changes might affect benefits. But if you're looking strictly at the numbers, you need to know your break-even point—the age at which you'd collect the same total amount, whether you start at 62 or at 70.

The current average life expectancy in the U.S. is about 78. Baby boomers will reach their break-even point at just about age 80. If you think that you'll live longer based on your health and family longevity, it might pay to wait before you collect. But if you have reason to think that you'll die younger, then you should consider starting your benefits as soon as you're able.

Longevity insurance

Aside from aiming to get the greatest amount of total benefits, though, is the question of whether you can afford to postpone them. At least 40 percent of households surveyed between 1992 and 2006 had the financial wherewithal to delay benefits until at least age 66, according to the Center for Retirement Research at Boston College. But today many people over 62 have been hit with the double whammy of a job loss and depleted retirement assets. Some will have no choice but to turn to Social Security benefits earlier than expected for a dependable income stream.

If you're currently facing the decision of when to start your benefits, keep this in mind: Every year you delay payments past full retirement age increases your monthly benefit by 8 percent, a rate of return you'll be hard-pressed to duplicate with investments. And since Social Security payments will continue no matter how long you live, they're almost certainly the cheapest form of inflation-adjusted longevity insurance you will ever find.

Even if you decide to take your benefits early—or are forced to—it's still possible for you to change your mind and obtain the larger monthly payout you would get starting at age 70. Let's say you decide to collect because of a job loss, then find another position. You can arrange with the Social Security Administration to start over by filling out form SSA-521.

To start over you'll have to pay back the money you've received to date, though you won't owe any interest on it. Knowing this may help take the sting out of having the misfortune of possibly being forced to take a smaller, earlier benefit when the market is in a downswing. When the market comes back, you can take some of the gains you've accrued in your portfolio to pay back the Social Security money you've received, and get a higher monthly benefit check later.

Of course, the market has to cooperate, and there are no guarantees. But we've tested some scenarios to see what sort of return you'd need for this approach to be worthwhile. Naturally, the larger your retirement nest egg, the less interest it will have to throw off to offset the distributions you've received. See Buy an annuity or start all over? for an example of how this might work.

Collect and invest?

You could choose to take your benefits at 62 and invest the money on your own, but this approach might not provide the best return. First, your investments need to beat the rate of inflation, which, although tame now, is projected to be about 1.8 percent a year over the next decade.

Let's say you decide to bank the 96 monthly checks you get from ages 62 to 70. Assuming you were fortunate enough to best inflation by 2 percentage points a year, you could build a pool of money that would pay you an additional $1,000 a month in income—until you turn 82. At that point the money would be drawn down to zero, and your continuing Social Security checks would still be based on your benefits at age 62. By paying back Social Security and starting over, you could get nearly that amount no matter how long you live.

Here are some other factors to consider:

  • You can take your benefits early and continue to work. But if your earnings exceed certain amounts, some of your Social Security money will be withheld until you reach full retirement age. Your benefits will then be recalculated, and you'll receive credit for any months your Social Security payments were reduced. Your benefits may actually increase if those final working years replace a lower-earning year with a higher one, since your benefit is calculated using the 35 years in which you earned the most income.
  • The spousal benefit is also affected by taking benefits early. Your spouse's share of your benefits will be reduced by as much as 30 percent if you start taking them at age 62. Given the choice, the spouse who earns less should be the one to claim Social Security benefits at an earlier age. If the primary breadwinner dies first, then the survivor's benefits will be greater. And if you're not ready to take your payments yet, you can still get spousal benefits. You'll both still have to apply, but you can then immediately suspend the primary benefits and retain the spousal benefits.
  • Even if you decide to wait past age 65 before taking retirement benefits, be sure to sign up for Medicare three months before your 65th birthday. If you take Social Security benefits early, you'll receive Medicare automatically on the first day of the month you turn 65.
  • Normally, Social Security benefits are subject to a cost-of-living adjustment, or COLA, every year that is based on changes in the Consumer Price Index, the government's measure of inflation. Since the change in the CPI was negative last year, there will be no COLA for 2010. But the cost of living for older people is generally higher than it is for the average American, primarily because of health-care costs. There is a silver lining to this news, though: With a few exceptions for the very well-off, Medicare Part B premiums aren't allowed to rise in years when there is no cost-of-living increase for Social Security beneficiaries.

This article appeared in Consumer Reports Money Adviser.

Posted: November 2009—Consumer Reports Money Adviser issue: December 2009