How do I compute the financial advantages and disadvantages of taking Social Security as soon as I'm eligible?
Asked by
Jeruba (
55824
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October 12th, 2009
I understand that the benefit increases the longer you wait to take it, up to a maximum, and I understand that whatever level you start taking it at is the one you stay with. I have also looked at the Social Security website, which tells me what factors to consider.
I’m not asking for advice or for factors to consider. What I want is just some help computing the numbers. If I start taking SS at age 62½ at a lower rate, rate A, that will amount to x dollars in, say, 2½ years. So how long would I have to receive the benefit at the higher rate B, at age 65, for the difference to equal the sum of what I got for those 2½ years? How long before the additional amount at rate B adds up to the x dollars I would have got at rate A for a period of time T? What I’m looking for here is the formula for calculating that.
Of course I don’t know how long I’m going to live (I didn’t opt to know my date of death), but I would still like to be able to judge whether I have a better chance of coming out ahead by taking the lower rate sooner or waiting for the higher rate.
When I try to think this one through and turn it into a formula, I get kind of muddled. I need one of you math guys to help me figure it out. Thanks.
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9 Answers
I receive a statement every year from Social Security 2 months before my birthday. It tells me what my payment will be at age 62 if I stop working then. It tells me what the payment will be at full retirement age 66 and 8 months if I quit working at that time. It tells me what I will make at age 70, if I work up until that time. It also tells me what I would make if I became disabled at this time. Is this what you mean?
Ok. Here goes. You’re looking for the date at which the two plans even out.
That is, you want the time in months T where the difference in the two rates equals the total you’d be getting if you take it earlier.
Total amount earned = number of months * difference in monthly rate
30A = T * (B – A)
T = 30A / (B – A)
Where A is the monthly rate at 62½, B is the monthly rate at 65, and T is the number of months after 65 where you’d be even. If you see yourself living longer than that, then wait.
My gut feeling is that if you can wait, you’d recoup your “losses” very quickly.
Yes, that’s exactly what I want, @andrew. Thank you.
So—if I look at the numbers for age 62 and age 66, I should be using 48 instead of 30, yes? I just did that. The answer I got from your formula was about 120. I presume that’s in months? So the answer is 10 years. I’d have to live to 76 before it becomes advantageous to have waited for the higher rate. Or is it 72? Ten years past which date? Oh, dear.
@chyna, I get those statements too. What I’m trying to figure out is if it’s worth it to wait. If I start collecting sooner at a lower rate, I’m receiving dollars all that time. So how much will I be ahead by, and for how long, if I don’t wait, and how long before it’s a wash? That’s what I was asking.
I realized that after I saw Andrew’s answer.
The difference in mine is 500 dollars a month between 62 and 66. I think I will wait, if I can, til I’m 66 to get the higher amount. My grand parents live to be in their late 80’s and my grandmother is 98 right now.
@Jeruba That’s correct.
T is the number of months past the second date where you break even.
And 30 is the number of months between the two dates, yes.
@andrew, that was SO helpful! Thank you very much. And @MagsRags, very good article. Thank you. @chyna, I appreciated your comments too. I’m at the point now where I need to think about some of this stuff, and it is bewildering.
Jeez, I didn’t know the age went up to 66, I will be 65 soon and I was planning on collecting, now I am wondering if I should wait the extra year???
If you plan to continue working, it’s best to delay taking your annuity until you’re fully eligible. If you take it early, there are restrictions on how much you can earn before your benefits are reduced. http://www.ssa.gov/pubs/10147.html
“When you reach your full retirement age, you can work and earn as much as you want and still receive your full Social Security benefit payment. If you are younger than full retirement age and if your earnings exceed certain dollar amounts, some of your benefit payments during the year will be withheld.”
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