Last week marked part five of a five-part series, Do Your Homework Before Flipping the Social Security Switch, that discussed four factors that should be considered individually and collectively when making the decision regarding when to begin receiving Social Security benefits. The four factors are as follows: (1) Potential employment income between age 62 and full retirement age (“FRA”), (2) Income tax attributable to Social Security benefits, (3) Affect on amount of spouse’s Social Security benefit, and (4) Health.
While the series focused on whether you should start your benefits at age 62 vs. at FRA, i.e., age 65 to 67 depending upon your year of birth, the last three factors will also come into play when deciding whether to defer your commencement date beyond your FRA. Assuming that after completing your analysis of the four factors, you decide it makes sense to wait until FRA to begin collecting your benefit, should you wait even longer, and, if so, how long?
In addition to being able to potentially increase the amount of your benefit by working additional years after FRA, Social Security Administration provides you with an incentive to delay your start date until as long as age 70. The incentive comes in the form of an increase in your benefit percentage, called delayed retirement credits, for each year beyond FRA that you delay your start date until age 70 at which point the credits end. The annual percentage increase varies from 4.5% to 8% depending upon your year of birth. Individuals born in 1930 or earlier are entitled to a 4.5% increase while those born in 1943 or later can receive an 8.0% annual increase in their benefit amount.
Using myself as an example, my most receipt Social Security Statement shows that at my full retirement age of 66 and two months, my estimated monthly retirement benefit is $2,475. Since I was born after 1943, if I wait until age 70, my benefit should be approximately 32% greater (8% x approximately 4 years) than if I begin receiving it at age 66 and two months. It turns out that, per my Statement, at age 70 my estimated monthly retirement benefit is $3,282, or 32.6% greater than what it would be at my FRA. This works out to an annual benefit of $39,384 ($3,282 x 12), or $9,684 greater than my FRA benefit of $29,700 ($2,475 x 12).
By waiting three years and ten months, i.e., from 66 and two months until age 70, I can increase my Social Security retirement benefit by one-third. That seems like a pretty good deal to me. Being a numbers guy, you know that’s not the end of my analysis. For one thing, I want to know how long it will take for me to break even, i.e., at what point will my cumulative benefits be the same if I delay commencement of my start date from age 66 and two months to age 70 assuming that I spend, and don’t invest, my benefits?
Per Exhibit 1, I’m better off until age 81 by starting my benefit at FRA. Beginning sometime during my 81st year, however, it will be more advantageous for me to wait until age 70 to flip the Social Security switch since my cumulative benefits will begin to be greater. While break-even age is important in my analysis, it’s a nice starting point. From there, I would want to take a close look at the last three factors mentioned at the beginning of this post. Since I’m still more than ten years from my FRA and income tax laws, the affect on my spouse’s Social Security benefit, and my health are all subject to change during that time, I have the luxury of being able to defer my decision whether to defer my Social Security start date to age 70.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.