Tuesday, November 2, 2010

Q&A Series - When Should I Start Drawing Social Security Retirement Benefits?

This week's question comes from Jane, a reader pondering her Social Security retirement benefit options.

Q: I’ll be 66-years old in February of 2011. I am still working, and to this point, I have not drawn any early Social Security retirement benefits. My most recent Social Security statement indicates that I’ll be drawing $2,356 per month at full retirement age, but if I wait until I turn 70, my monthly benefit will be $3,096. Should I start drawing benefits when I turn 66 or would it be better for me to wait until I’m 70?

A: This is an interesting question, Jane, and a topic that I’m asked frequently about – Social Security retirement benefits. There’s a lot to consider when it comes to deciding when it will be best for you to start collecting these benefits, and it’s important to think carefully about your personal situation when figuring out which route to take.

Your choices are to start collecting retirement benefits early at age 62 (which you have decided not to do – I’ll talk more about that option in a future post); wait until you reach full retirement age (between 65 and 67, depending on your birthdate), or; hold off even longer (you can continue earning delayed retirement credits, which increase your benefit amount, until age 70). Some important questions to consider are:

• What are your current cash flow needs?
• How much do you anticipate needing in retirement?
• Are you in good health?
• Do you plan to continue working in retirement?
• Do you have other forms of retirement income?
• How much would you receive in the form of a Social Security benefit?

For illustration purposes, I’m going to assume that Jane is single and will have some other form of income (either retirement income or from continuing to work) that will take care of her cash flow needs. Therefore, the Social Security benefits she receives would simply supplement her income.

From the information Jane provided, she would clearly receive a higher monthly benefit - $750 more per month – if she waits until she turns 70 to start collecting Social Security retirement benefits. However, the risk in waiting to start collecting benefits until age 70 is that if she dies before then, she will have received nothing and her beneficiaries would be left nothing via her Social Security.

In a similar scenario provided by the Social Security Administration, they indicate that if a person retires at full retirement age (age 66 in this scenario), the accrued benefits after four years would be $112,608 ($2,346 x 48 months). If you divide $112,608 by the additional $750 per month you would receive by waiting to collect benefits until age 70, then it would take 150 months (12½ years, or until age 82½) to reach the breakeven point (not considering the time value of money) between collecting benefits beginning at full retirement age or waiting until a person turns age 70.

Therefore, at age 82½, a person’s accrued additional payments for waiting until age 70 to start drawing benefits is exactly equal to the first four years of total payments received by a person who begins collecting at age 66. By this illustration, it appears that if you live beyond age 82½, you would be better off starting retirement benefits at age 70.

In my opinion, there is an excellent alternative that many of our clients are taking advantage of today and that warrants your consideration. If you save 100% of your Social Security retirement benefits from age 66 through age 70 while you are still working or have other forms of retirement income and earn 5% per annum, you would have an accumulated balance at age 70 of $124,891 ($2,346 x 48 months = $112,608 + $12,283 interest). Then, at age 70, if you start withdrawing the $750 difference from this account on a monthly basis but still earn 5% on the remaining balance, it would take 23½ years to get to the breakeven level using the age 70 monthly benefit amount. With this method, if you were to die early, then you would still have a nest egg to pass on to your beneficiaries.

As you can see, by using this method you could live to age 93½ (11 years longer) before it would have been better to wait until age 70 to start drawing Social Security retirement rather than starting benefits at full retirement age. While we hope all of our clients live at least that long, it’s highly likely that many will not.

In short, if you properly invest your Social Security benefits, we believe you are always better off starting them at full retirement age rather than at age 70. However, if you intend to spend all of your benefits as they are received, you would be better off waiting until you are age 70 to start drawing your retirement benefits.

Jane, I hope my explanation above has given you some understanding of when and how we suggest individuals start drawing Social Security retirement benefits. It’s always best to thoroughly evaluate your particular situation to determine the best way to maximize your own benefits, and in that regard, Rollins Financial is here to help. Navigating Social Security benefit options can be tricky, but we can help you make the best decisions to positively impact your retirement years.

We encourage our clients and readers to send us questions for our Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins


Anonymous said...

Does the same logic apply to the 62 vs. 66 decision?

Rollins Financial Advisors, LLC said...

Thanks for your question. Please read our November 17 follow-up to this original post for information on starting SS retirement benefits at age 62.