This spring, I will reach Social Security’s “normal full retirement age” of 66 years 8 months and so the timing of when to take Social Security benefits is on my mind. Every American approaching age 62 has to make an irrevocable decision that can have a profound impact on their retirement finances. Should one start taking Social Security benefits at age 62, age 70, or somewhere in-between? The current “normal” Social Security retirement age is 66 years 8 months. If you start taking your Social Security benefits before that age, the amount of your annual benefit is reduced. If you wait until you are older than 66 years 8 months, then the amount of your annual Social Security benefit increases. The earliest a person can start taking Social Security is age 62 and the latest is age 70. The optimal age to take Social Security depends on how long you expect to live and if you start taking Social Security early, whether you spend that money or invest it. In this post, I will go through the calculations to help you make the best decision for you personally.
- If you live to be older than 79.7-years-old, you are financially better off to wait to take Social Security at age 70 than take it at age 62 and spend the money.
- If you live to be older than 82.4-years-old, you are financially better off to wait to take Social Security at age 70 rather than at age 66 years 8 months and spend the money.
- If you live to be older than 84-years-old, you are financially better off to wait to take Social Security at age 70 rather than take it at either age 62 or age 66 years 8 months if you invested the annual benefits rather than spent them.
- Because of their longer life expectancy, women benefit more than men by waiting to take Social Security at age 70.
- There are several other variables that you should consider when deciding when to take Social Security benefits.
Some assumptions
All too often, financial pundits make overly simplistic opinions about the best age to start taking Social Security without factoring in the effects of inflation, the annual Social Security cost of living increase in benefits, and the return on investment if a person takes Social Security early and invests all of the money from those benefits. Before we go through the math, let’s make some assumptions.
In order to qualify for Social Security, an American must work and pay Social Security taxes for 40 quarters. In other words, you have to work for at least 10 years. The amount of your Social Security benefit is based on your average inflation-adjusted income during your working years. However, this is only your income subject to Social Security tax. In 2024, the maximum income subject to Social Security tax was $168,600. If you made $200,000, you only paid Social Security tax on $168,600 and you did not pay Social Security tax on the remaining $32,000. Therefore, the highest income that Social Security will use in calculating your benefit will be $168,600. For the calculations below, we will assume that a person turning 62-years-old this year (2025) will retire and stop working full-time and also assume that in 2024, this person had an income of $168,600 or more. That person’s annual Social Security benefit would be:
- $29,124 per year if Social Security starts at age 62 years
- $40,680 per year if Social Security starts at age 66 years 8 months
- $51,300 per year if Social Security starts at age 70 years
By law, Social Security benefits increase each year based on inflation. Specifically, benefits increase the same amount as the consumer price index (CPI) increases. Historically, the CPI has increased by an average of about 2.5% per year and thus Social Security benefits have also increased by an average of about 2.5% per year. This means that a retiree will have exactly the same buying power from their Social Security check every year for the rest of their life.
A final assumption pertains to life expectancy. Based on the Social Security Administration’s actuarial tables, on average, a 62-year-old man will live to age 91 and woman to age 94. At age 66 years 8 months, a man will live to age 93 and woman to age 95 on average. At age 70, a man will live to age 94 and woman to age 96 on average. But these are averages for all Americans – if you are a 62-year-old man who smokes, is obese, and has diabetes, then it is unlikely that you will live to age 91.
Scenario #1: You take Social Security benefits early and spend them
Using our hypothetical 62-year-old who had $168,600 of income in 2024 and retires in 2025, by the time this person turns 70-years-old, that total benefit would be $260,791 ($29,124 per current year x 8 years with 2.5% annual cost of living increase). But if that person had waited to start taking Social Security at age 70, the annual benefit would be $62,504 ($51,300 per current year with 2.5% annual cost of living increase). Because of this increase in the annual benefit by waiting until age 70, in 9.7 years, the person waiting until age 70 will have made up the difference in total Social Security benefits compared to the person taking Social Security at age 62. In other words, if the person waiting to start taking Social Security until age 70 lives to age 79.7-years-old, then they come out financially ahead of the person taking Social Security early.
Now let’s use the same calculations for a person waiting to start taking Social Security benefits until age 70 instead the normal full-retirement benefit at age 66 years 8 months. In this case, the person who delays taking Social Security benefits until age 70 would need to live to age 82.4 to come out financially ahead of the person who starts taking Social Security at age 66 years 8 months.
The bottom line is that if you live longer than age 79.7-years-old, you are better off delaying Social Security until age 70 rather than taking it at age 62. If you live longer than age 82.4, then you are better off delaying Social Security until age 70 rather than taking it at age 66 years 8 months. Because the actuarial life expectancy at either age 62 or age 66 years 8 months is considerably older than this, most Americans are financially better off taking Social Security at age 70 rather than taking benefits at an earlier age and then spending those benefits.
Scenario #2: You take Social Security benefits early and invest them
A commonly held belief is that if you take your Social Security benefits starting at age 62 and invested the money rather than spending it, you will be financially better off than if you wait until age 70. It turns out that this is not true – at realistic investment returns, you are still better off waiting to start taking benefits at age 70.
Once again, let’s use our hypothetical 62-year-old retiring this year and earning an income of $168,600 in 2024 and starts taking Social Security benefits now, at age 62. But instead of spending the money, he invests it until age 70. At age 70, he withdraws enough of his invested money each year to equal the amount of the annual benefit he would have received if he waited to start Social Security at age 70. Let’s look at how much money he would have at age 70 if he got investment returns of 2%, 3%, 4%, 5%, 6%, 7%, or 8% per year. We will again assume an average annual inflation rate of 2.5% and an average cost-of-living increase in Social Security benefits of 2.5% per year.
The table below shows that even with an exceptional annual investment return of 8%, a retiree who starts taking Social Security benefits at age 62 will have run out of the money he invested his benefits in at age 92. In other words, if he lives to age 92, he would have more money if he had waited to start taking Social Security benefits at age 70 instead of age 62. If he had a more realistic investment return of 5% per year, then he would run out of those invested benefits at age 84. Since that person would have an actuarial life expectancy of 91 years (men) or 94 years (women), he/she would lose money by taking Social Security at age 62 instead of age 70. We see similar results for the person who starts taking Social Security benefits at age 66 years 8 months rather than at age 70 years.
If you invest Social Security benefits every year between ages 62 and 70 and then you start using that invested money at age 70 in order to equal the amount of the Social Security benefit that you would have received if you waited, then you are looking at a relatively short investment horizon. Because of this, it would be far more prudent to invest that money in a low-risk investment such as bonds, certificates of deposit, or a money market fund. For this short of an investment horizon, it would be far too risky to invest the money in stocks. For this reason, an investment return of 5% per year is probably realistic. If the investment return is less than the average annual inflation rate of 2.5%, then your money is actually losing buying power every year.
Other factors to consider
- Your health. The above calculations are based on average life expectancy. We all think that we are going to live to be 100-years-old but the reality is that most of us die long before that. If you die before the average life expectancy, then it may be better to start taking Social Security benefits at an earlier age than 70. Variables that will likely shorten your life expectancy include chronic health conditions, smoking, obesity, depression, vaccine avoidance, seat belt avoidance, etc.
- The Social Security Trust Fund might run out. The money that you paid into Social Security in payroll taxes during your working years is not really your money. Those payroll taxes you paid were used to pay Social Security benefits for those Americans who were already retired. When we retire, our Social Security benefits come from the payroll taxes of Americans who are still working. For that reason, the optimal ratio of working adults to Social Security recipients is 4:1. That is, four working Americans for every one retired American. Back in 1965, that ratio was 4:1 but the U.S. birth rate has been falling and immigration of new working adults into the U.S. has not kept up and so the current ratio is 2.7:1. This ratio is too low to sustain Social Security and for this reason, the Social Security Trust Fund is projected to become depleted in 2035. After that year, everyone’s Social Security benefit will be reduced by 17%. If this happens, then you would be better off taking Social Security benefits early at age 62 or age 66 years 8 months based on the maxim “Its better to take while the taking is good“. It will be up to Congress to either increase payroll taxes or Federal income taxes to avoid depletion of the trust fund.
- Congress. The real wild card is Congress – they could pass laws that change the ages that you can take Social Security benefits. Or they could eliminate the annual cost-of-living increase in the amount of retirees’ benefits. or they could lower everyone’s benefit. Or they could even privatize Social Security. Any of these changes in the law could affect whether or not it is advantageous to wait to start taking Social Security benefits at age 70.
- Immigration. As noted earlier, the U.S. birth rate has fallen significantly over the past 50 years and this has resulted in a critical reduction in the ratio of current workers to retirees. Even if there was a concerted effort by Americans to have more babies today, that would not result in an increase in the ratio of workers:retirees until 20-30 years from now (when all of those babies grow up and start paying payroll taxes). Unless we have another pandemic like COVID that preferentially kills off older, retired Americans, then the only realistic way of increasing the ratio of workers:retirees is to increase immigration. Specifically, increase immigration of adults who pay into Social Security via payroll taxes. Undocumented immigrants don’t help – they do not pay payroll taxes. A concerted effort to increase the number of legal immigrants would increase the ratio of workers:retirees and push back the date that the Social Security Trust Fund runs out of money. The bottom line is that the U.S. desperately needs more legal immigrants in order to keep Social Security solvent. However, in the current political climate, it is unlikely that the U.S. will seek to increase immigration into our country anytime in the near future.
- Your risk tolerance. The decision about when to start taking Social Security benefits is in many ways a gamble – by waiting to take benefits at age 70, you are taking the risk that you are going to live to be older than 84 and that Congress will eventually restore the Social Security Trust Fund. If your risk tolerance is low, then you may want to take the lower Social Security benefit at an earlier age, such as age 62 – you will be assured of having a known benefit income (albeit lower) and you won’t have to worry about the financial risk of either dying young or having the Social Security Trust Fund run out just as you would have started to take benefits at an older age. To invoke another maxim: “A bird in the hand is worth two in the bush“.
- You need money now. If you have not saved for retirement and you want to stop working at age 62, then you may have no choice but to start taking Social Security benefits at age 62. In this situation, deferring the start of Social Security until age 70 in order to get a bigger payday could mean selling your plasma and living off of cat food for the next 8 years.
So, what am I going to do?
As I rapidly approach the “normal” Social Security retirement age of 66 years 8 months, I’ve decided to hold off taking Social Security benefits until I am 70-years-old. I don’t have any chronic medical conditions, I have a normal BMI, I always wear a seatbelt, I am a lifetime non-smoker, I’ve been vaccinated against every conceivable infection, and I don’t engage in any high-risk activities. So, there is a good chance that I will live to be older than 93. By that age, I will have received far more money from Social Security by waiting to start benefits at age 70 than by taking benefits now and then investing those benefits.
February 27, 2025
