As you consider your Social Security benefits and when you might begin to draw them, keep in mind that the benefits you’re receiving are actually akin to an annuity – a stream of income that you will receive from the time you start the benefits throughout your life. As with an annuity, if you live longer than average, you will receive much more than the original value (premium) of the annuity. If you have a way to increase the amount of the stream of income, by delaying start of the benefits, the overall amount that you eventually receive will increase as well (assuming you live longer than average).
Let’s say that your Social Security benefit would be $1,500 at Full Retirement Age. If you started your benefit early at age 62, your benefit would be reduced to 75% of that amount, or $1,125; if you delayed your benefit to age 70, the benefit amount would be increased by 32% to $1,980.
If you started receiving benefits at age 62 and you lived to age 75, the total benefit that you receive over your lifetime would be $189,000 – not including Cost of Living Adjustments. In a similar manner, calculating the total lifetime benefit if you started receiving benefits at Full Retirement Age (FRA, age 66 for folks reaching that age these days) comes out to $180,000 if you live to age 75. Waiting to age 70 to start benefits results in a lifetime benefit (to age 75) of only $142,560.
So if you only live to age 75, it makes the most sense to start your benefits as early as possible. But read on…
What’s interesting about this sort of calculation is that if you live beyond age 75, say to age 80, now your lifetime benefits are starting to be greater by delaying a bit. If you start at age 62, the total lifetime benefit would be $256,500 through age 80; starting at 66 results in $270,000 over your lifetime. Delaying to age 70 still results in a lower lifetime benefit at this age – only $261,360.
So if you happen to live even longer, let’s say to age 90 – now the later you’ve delayed results in the greatest overall lifetime benefit. Starting at age 62 results with a total lifetime benefit of $391,500; 66 amounts to $450,000, and beginning at age 70 yields $498,960.
What about the value of that income stream in today’s dollars?
There’s another calculation that we financial guys do when evaluating things like annuities – it’s known as a Net Present Value (NPV) calculation. Essentially what we do is to take the value of the cash flows and use a set rate of return to determine what amount of money we’d need in order to produce those cash flows at those times in the future.
So, for our example above, using a rate of return of 5%, we come up with the following net present values of the cash flows:
|Age to start||NPV to age 75||NPV to age 80||NPV to age 90|
As you can see, the NPV increases for your delayed receipt of benefits starting with a lifespan of age 80, and becomes more pronounced if you live even longer. As we saw with the total lifetime benefit, there’s a higher value to the cash flow if you start early only if your lifetime is relatively short – in this case, to age 75.
This is the reason that we financial-types often recommend delaying receipt of Social Security benefits. As the figures above attest, there can be a substantial lifetime benefit increase if you life beyond age 80 – in our example it comes to over $100,000 by changing your start date from age 62 to age 70 and you live to age 90. Of course, if you don’t happen to live beyond age 80 (and who knows how long you’ll live?) starting earlier will likely result in the greater benefit for you in your lifetime.
Given that folks are living longer and longer these days, you should really consider delaying Social Security benefits as your strategy. Keep in mind that we’re only talking about a single person’s benefits – for a couple, the calculations become infinitely more complex, as we have to account for two lifetimes, two potential benefits, and spousal and survivor calculations. We’ll get to that next time…