When Should I Draw Social Security

From Bob Jennings at TaxSpeaker. Check out more at taxspeaker.com

The number one question in America regarding Social Security is “At what age should I sign up?” Bluntly, no one can answer that question except you. Your answer should be based on your analysis of the three factors that determine when you should draw: genetics; personal health; and financial need. The choice to draw at age 62 or waiting until 70 may be the wisest or worst financial decision you will ever make, depending on this three-factor test. 

Test 1: Genetics can be summarized as at what age did your ancestors of your sex die (except accidents)? If you are a man and your dad and grandfather died in their 60’s then genetics are not on your side. Genetics are not a true indicator, but they play a major part of your decision.

Test 2: Personal health could be based on the life expectancies provided above, as adjusted downward for smoking, diabetes, kidney disease and obesity. These factors will generally take off about ten years of an individual’s life expectancy.

Test 3: Financial need is a complex factor. Don’t worry as all of this is explained in depth throughout our Social Security book. But some simple introductory guidance may be provided to help this decision before reading on. All Americans have something called a Full Retirement Age (FRA), which is the age used to determine their monthly benefit check. For most Americans, today it is between 66 and 67. The author’s FRA is 66 and his eleven-year-old grandson’s is 67, so there is not a lot of variation. All Americans may also draw Social Security as early as age 62, but their monthly benefit will be permanently reduced roughly 6% per year for each year they draw early. Conversely, the benefit will increase each year they wait beyond age 66 by about 8% annually until they reach age 70. 

Let’s say Bob’s benefit at his age 66 FRA is $1,000 monthly. Then if Bob draws early at 62, he will only receive about $750 monthly (A $250 monthly reduction I call the “forever penalty”), and if he waits to draw until age 70, he will receive about $1,320 monthly.

But if Bob is married or has dependents drawing on his account as well, they will also be affected by Bob’s decision to draw.  If Bob draws at 62, he will receive 48 checks of $750 monthly, which also means he will have drawn $36,000 in checks by the time he is 66, ignoring any cost of living increases. 

Is there a break-even point between drawing early and paying the forever penalty, or waiting until full retirement age (or longer)? Yes, if Bob waits until 66 to sign up, his check will be $250 more per month than his age 62 check. Since Bob has received $36,000 in early benefits, if you divide the $36,000 in total early benefits received by the $250 monthly difference between the age 62 and 66 benefits, you get 144 months from Bob’s full retirement age of 66 or when Bob is age 78 as the break-even point. So, if Bob draws at 62 and lives beyond age 78 this has probably been an unwise financial decision, but if Bob dies before age 78, he has made an excellent choice (financially!). In either event the break-even point is 6 years sooner than his life expectancy.

However, we ignored annual cost of living increases, which would have a greater positive impact on the larger age 66 benefit than it would on the age 62 benefit. And what about if Bob waited until age 70 to draw, what would be that break-even point? (1320-750=570 more per month at age 70, but Bob would have received 96 checks of 750 or $72,000, divided by 570= 126 months beyond age 70), for a roughly 80 ½ year old break-even point, which is still less than his statistical life expectancy. Are you getting an idea that this stuff is complicated? It would appear based on these simple factors that waiting until age 70 is usually a better choice, but we have ignored cost of living increases, earnings on invested benefits, spousal benefits, dependent benefits, filing strategies and more, all of which will be explained in our big 8 hour course. As you are beginning to understand, the decision when to draw is the single most important and complex decision many Americans will ever make, and they are making it without guidance!