United States: Deciding When to Begin Receiving Social Security Benefits

For many Americans, their monthly Social Security check represents a significant portion of their annual retirement income. According to some studies, even the wealthiest 40% of retirees depend on Social Security for up to a third of their retirement income, on average.

Given the importance of this income stream, it is important to take great care in deciding when to begin receiving benefits. The benefit that you receive every month will depend to a large extent on whether you apply for benefits at age 62, at your full retirement age (65 to 67, depending on the year you were born), or at age 70.

Your monthly benefit at age 62 could be as much as 25% less than your "full" benefit at age 66, but delaying your first payment until age 70 could result in your monthly benefit being up to 40% higher than your "full" benefit. Furthermore, these differences apply to all of your lifetime payments.

If you knew for certain how long you would live, and if your only concern was to receive as much as possible from Social Security during your lifetime, deciding when to begin receiving payments would be quite simple.

The following table illustrates the benefits you would receive based on three different starting ages. The amounts assume that the individual receiving the benefits had an annual income, while working, of $60,000 and qualified for full benefits at age 66 in 2017. The amounts are in constant 2005 dollars and do not include potential earnings from reinvestment. Actual income will include increases in benefits based on inflation.

As the table indicates, postponing Social Security benefits can pay off – in the long run. As it also indicates, if you knew you would not live past age 75 you would want to begin receiving your benefits at age 62. On the other hand, if you assumed that you would live until at least age 80, you might consider waiting until full retirement age (65 to 67, depending on the year you were born). The advantage of deferring your collection of benefits until age 70 eventually exceeds the advantage of starting at age 62, but not until sometime between ages 80 and 85.

Since you do not know how long you will live, you may want to rely on some statistical information. In a 2005 report, the National Center for Health Statistics said that, on average, Americans who are 65 years old live to about age 83 (age 84.5 for women and age 81.6 for men). In addition, considering your current state of health and your family medical history may also help you estimate how long you will live. But these, obviously, are not definite indicators as to when you should start collecting your Social Security benefits.

We have to admit that there is no ideal age at which to begin collecting. It varies from person to person and is usually apparent only in hindsight. What we can say is that the most prudent approach is to base your decision on whether you need extra income at age 62 or thereafter, and on the state of your health.

Please do not hesitate to contact us if you have any questions regarding making a decision as to when to begin receiving Social Security benefits.

For more information, please contact Michael A. Gillen, director of the Duane Morris Tax Accounting Group.

This newsletter is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.