Social Security Benefits - When to Begin Collecting Them

As with most financial planning topics, this question, although seemingly straightforward, is actually rather complicated. As a result, when it comes to retirement planning, there are few issues that raise as much interest right now as Social Security.

Although it’s been around since 1935, most people today still admit knowing very little about Social Security and how it works. Yet, it is an important aspect of any retirement plan. Consider the following statistics:

• Nine out of ten individuals age 65 and older receive Social Security benefits.¹
• Social Security benefits represent about 39% of the income of the elderly. ¹
• Social Security provides more than half of the income for nearly two-thirds (65%) of elderly beneficiaries.²
• For almost four out of ten elderly recipients (36%), Social Security provides more than 90% of their income.

According to the Social Security Administration, the average monthly benefit being paid to current retirees is $1,234 per month. For a 66-year-old man with an average life expectancy of 82, this represents total payments of well over $200,000 in today’s dollars.

With so much at stake, the decision to begin Social Security benefits becomes a critical one. Let’s review the basics, setting aside for the moment the rules of eligibility.

Social Security is based upon two central definitions: Primary Insurance Amount (PIA) and Full Retirement Age³ (FRA). Your Primary Insurance Amount (PIA) is calculated based on your earnings and your Full Retirement Age (FRA) is determined by your year of birth. (See the following table.)

Year of Birth	Full Retirement Age (FRA)
1937 or earlier	65
1938 – 1942	65 + 2 months for every year after 1937 until 1943
1943 – 1954	66
1955 – 1959	66 + 2 months for every year after 1954 until 1960
1960 and later	67

At your Full Retirement Age (FRA), you are entitled to 100% of your Primary Insurance Amount. The earliest you can collect Social Security benefits is age 62. However, for every month prior to your FRA, your PIA is reduced. You can also delay benefits past your FRA. Again, for every month past your FRA, you will receive Delayed Retirement Credits, which equal 8% per year, up to age 70.

So what does that all mean? Overall, it’s important to understand this: whether you begin benefits at age 62 (the earliest age) or age 70 (when Delayed Retirement Credits stop), Social Security is designed to pay out the same total benefits over the average person’s life expectancy. Let’s look at an example, very basic and completely hypothetical, involving an individual with a FRA of 66 and a PIA of $1,600/month.

Age benefits begin …	62	66	70
Percentage of PIA …	75%	100%	132%
Monthly benefit …	$1,200	$1,600	$2,112
Annual benefit …	$14,400	$19,200	$25,344
Total benefits received by age 70 …	$115,200	$76,800	$0
Total benefits received by age 80 …	$259,200	$268,800	$253,440
Total benefits received by age 90 …	$403,200	$460,800	$506,880

You notice that by age 80, the total benefits paid are roughly the same. Given the trend of prolonging life expectancy, there is compelling logic to consider delaying Social Security as long as possible.

However, the reality is there is no single right answer to the question. Instead, there are a number of considerations that should be taken into account when it comes to the decision to begin Social Security benefits.

• What is my current health and likely future health status?
• What is my life expectancy? Is there longevity in my family history?
• What is my current and future financial situation? Do I need the income?
• Do I intend to keep working? If so, for how long and how much do I earn?
• Do I have a spouse? What strategies are available to maximize our combined benefit? What strategies are available to best protect the surviving spouse?
• What is my political view on Social Security and its future?

In conclusion, it is our strong opinion that this decision should not be made casually, but only in consultation with a trusted financial advisor who is educated and experienced not just in the nuances of Social Security, but is aware of your overall retirement plan.

For more information on Social Security, contact us today. 

1 "Social Security Fact Sheet" Social Security Administration, December 2011; http://www.ssa.gov/pressoffice/factsheets/colafacts2012.pdf

2 "Policy Basics: Top Ten Facts about Social Security” Center on Budget and Policy Priorities, November 6, 2012; http://www.cbpp.org/cms/index.cfm?fa=view&id=3261

3 "Retirement Planner: Full Retirement Age” Social Security Administration; http://www.ssa.gov/retire2/retirechart.htm

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