Invest or Delay? Strategies for Taking Social Security Benefits

    by Christine Fahlund

    Invest Or Delay? Strategies For Taking Social Security Benefits Splash image

    While Social Security reform languishes, what does the current benefits schedule offer for those retiring or planning for retirement?

    Social Security can still be an important source of income, but can vary significantly depending on:

    • When benefits begin,
    • How much they might be reduced for early retirees who continue to work, and
    • How much is taxed.
    According to the Social Security Administration, someone born January 2, 1942 would reach full retirement age in November 2007 (age 65 years and 10 months). If that person paid the maximum in Social Security taxes for most of their working years, that person is eligible to receive a $24,544 Social Security annual benefit. This represents about 30% of this individual’s average Social Security taxable income based on the 35 highest earning years from age 22 until retirement.

    The “baseline” amount of an individual’s Social Security benefit assumes that benefits don’t start until “full retirement age.” Currently, “full retirement age” is 65 years and 10 months for someone born in 1942, but “full retirement age” rises for those born after 1942.

    However, the Social Security benefit amount increases for each additional year a retiree delays receiving payments past full retirement age until age 70.

    Conversely, the benefit amount is reduced for those who start receiving payments before their full retirement age. Individuals can start receiving payments (at the reduced level) as early as age 62. Table 1 shows the maximum Social Security scheduled benefit for those who begin taking benefits at their full retirement age, the reduced benefit at age 62, and the maximum benefit for those who delay until age 70. (Note: Those who are divorced or widowed should compare their own benefit with the one they may be entitled to based on the benefit earned by their deceased or divorced spouse, since the latter may be higher.)

    Table 1. Maximum Social Security Benefits (Based on Constant 2007 Dollars)
    Age 65
    Annual Benefit for Retiring at:
    Age 62* Age 70*
    2007 65.8 $24,544 $18,108 $33,806
    2009 66 25,109 18,299 34,476
    2014 66 27,862 20,373 37,731
    2024 66.8 31,454 22,054 40,224
    2033 67 34,740 24,013 43,753
    2043 67 38,682 26,741 48,714
    *Assumes January 2 date of birth.

    The table shows the annual benefit for a wage-earner who earned at least the maximum amount subject to Social Security tax for every year after age 21 used in the benefit calculation.

    Source: Social Security Administration.

    The obvious question for those who are eligible for Social Security is: Are you better off delaying the start of your benefits so you can receive the higher benefits, or are you better off receiving earlier but lower benefits?

    When to Take Benefits

    Analyzing whether you should take benefits at a reduced rate before reaching full retirement age, or whether you might be better off in the long run by waiting for your scheduled benefit at full retirement age or later, really depends on whether you can afford to delay receiving benefits and how long you expect to live.

    For example, a person who receives an assumed annual pretax benefit of $15,000 starting at age 62 will have received the same total benefits by age 77 (15 years) as if he or she had started receiving an assumed $20,000 annual benefit starting at age 66. From age 78 on, the cumulative benefit is greater if this individual had waited to begin benefits until full retirement age (assumed to be 66 in this hypothetical example).

    Figure 1.
    Total Projected Social
    Security Benefits Depending
    on Age They Begin*

    Likewise, if this individual delayed benefits until age 70, thus qualifying for an assumed benefit of $26,400, his cumulative benefits would be greater from age 80 on, compared with starting benefits at age 62. Although 80 may seem a long way off, some recent actuarial studies urge married investors who are 65, for example, to plan for at least one spouse living in retirement to age 95.

    If our hypothetical Social Security recipient lives to age 82 or longer, he would ultimately receive more total benefits if he began taking them at age 70 than if he started at 66 or 62, even though benefits are paid over a shorter period.

    These projections are reflected in Figure 1, which shows total Social Security benefits in current pretax dollars, depending on when benefits begin and how long they are paid. This hypothetical example assumes a $20,000 annual benefit at full retirement age of 66 compared with a $15,000 benefit at 62, or a $26,400 benefit at 70.

    Extreme care must be taken when deciding at what age to begin taking your Social Security payments. The annual amount, at whatever age you pick to begin taking Social Security, will be locked in (adjusted for inflation or possible other credits) for the remainder of your life, except in certain circumstances.

    Benefits and Earned Income

    The preceding examples assume the individual who is receiving his Social Security benefits is spending all of the benefits—and, of course, some retirees will have no choice. They will have to start taking benefits prior to full retirement age because they need the income.

    Those who continue to work after age 62 or just don’t need their benefits at this point may want to consider taking benefits early and investing them until either they stop working or the benefits are needed, or both.

    Before reviewing the viability of this “invest and spend” strategy, we must consider a couple of other factors that could affect the amount of your Social Security benefits.

    If you are at least 62, you can receive Social Security benefits and continue to work full- or part-time, but there is a trade-off. Until you reach full retirement age, your Social Security benefits are reduced by $1 for every $2 earned above a certain amount each year (this amount is $12,960 in 2007). In the year of your full retirement age, benefits are reduced by $1 for every $3 earned over $34,440 until you actually reach the month of full retirement age.

    Therefore, if you turn 62 this year and expect to receive $15,000 annually from Social Security, but you continue working with annual wages of $30,000, your annual benefit would be reduced by $8,520. This leaves only $6,480, pretax, to invest instead of $15,000. If your total wages were approximately $43,000 or more this investment strategy will not apply, since the $1 for $2 reduction would exceed the expected benefit and you would not have any benefits to invest.

    Once you reach full retirement age, however, you can work and earn as much as you like without any reductions in Social Security benefits. Moreover, your Social Security benefit at this point—full retirement age—would be recalculated to reflect any months you did not receive a benefit check due to income earned above the allowed limit.

    Therefore, if you are still working when you reach full retirement age and would like to start taking your Social Security benefits then and invest them, you can do so without any reduction in benefits no matter how much you earn.

    Taxing Social Security

    Taxes can also affect your Social Security benefits. If you continue to have substantial earned income or income from other sources such as investments in retirement, you may have to pay income tax on a portion of your Social Security benefits.

    For instance, married couples filing a joint return with between $32,000 and $44,000 in “provisional income” may have to pay income tax on up to 50% of their Social Security benefits, even if they earn no wages during this period. Couples with more than $44,000 provisional income may have to pay tax on up to 85% of their benefits.

    For single filers, up to half the benefit is taxable with provisional income of $25,000 to $34,000 and up to 85% is taxable for income over $34,000. (Provisional income is your adjusted gross income, including wages, plus any tax-exempt interest income from your investments plus half of your Social Security benefit.)

    Investing Your Benefits

    To examine another strategy, let’s suppose that our hypothetical retiree is a married individual who retires at 62 but continues working part-time, earning $30,000 annually. Would it be more advantageous for him to take reduced benefits at 62 and invest them aftertax until reaching full retirement age, when he stops working, or just delay receiving benefits until then?

    At 62, benefits are reduced for starting early, by any taxes paid on them and because of wages earned above the allowed limit. Our example also assumes benefits are adjusted for inflation at a 3% annual rate and that the earned income limits increase each year.

    In this case, the retiree is in a 25% tax bracket and invests his annual Social Security benefits starting at 62 in a taxable account that earns 6% pretax each year with long-term gains and qualified dividend income taxed at 15%.

    Upon reaching full retirement age at 66, this individual stops working and starts spending all his Social Security benefits. In addition, he starts withdrawing money annually from the taxable account in equal amounts at a rate that would deplete that account when he is 95.

    Figure 2.
    Comparing Strategies
    for Taking Social
    Security Benefits

    Would this be a better strategy than delaying benefits until he reached full retirement age or later, when he would qualify for a higher annual benefit amount ($22,510 after inflation at age 66)?

    Based on our analysis, at age 80 this individual would have been slightly better off to delay taking benefits until 66, as indicated in Figure 2. This is because by age 80, the withdrawals from the taxable side account plus its remaining balance, combined with the total Social Security benefits received aftertax from age 66 on, is slightly less than the value of the total benefits received if benefits were started at the normal retirement age of 66. Prior to 80, taking benefits early and investing them would have been the better strategy.

    What if this individual kept working and decided to delay benefits until age 70, at which time his assumed annual pretax benefit would be $33,443, adjusted for inflation, instead of $15,000 at 62? In this case, he would have to live until at least 84 to make the delay worthwhile, as opposed to initiating benefits at 62 and investing in the taxable account until reaching 70 (as reflected in Figure 3).

    Figure 3.
    Comparing Strategies
    for Taking
    Social Security Benefits

    Likewise, starting benefits at 66 and investing them until 70 would be advantageous versus starting benefits at 70 unless he lives to at least 86.

    Our analysis indicates that unless the individual expects to live into his mid-80s, he may be better off taking the Social Security benefits as soon as he can and investing them, rather than waiting until age 66 or 70. But it’s close enough to look at other factors.

    For example, if you want some extra protection in old age and expect to live past 90, you should consider delaying benefits as long as possible—until age 70—assuming you do not need the money before then.

    Keep in mind that our 6% pretax annual investment return is hypothetical. Moreover, discipline is required to invest the benefits each year and not to draw on that account until reaching full retirement age or later. Are you that disciplined?

    Many financial planners used to recommend taking and spending your Social Security as soon as you become eligible. But today, with people living longer in retirement, delaying Social Security for as long as possible may be a better strategy, since in your later retirement years your payments will be larger at a time when your other assets may be declining.

    Taking benefits early and investing them if you can is another strategy definitely worth considering.

    To determine the best strategy for receiving Social Security, especially if you retire early but plan to continue working and earning some income, we suggest that you consult a financial adviser. Whatever you do, be sure to take your Social Security benefit election seriously. It’s important to understand your choices and their consequences.

    Christine Fahlund is senior financial planner for T. Rowe Price Associates, an investment management firm based in Baltimore, Maryland (

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