A Third Option for Collecting Social Security

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Most working people know about the tradeoff when starting Social Security benefits: start early and you receive benefits for more years; start later and you’ll get more each month.

Basically, the decision is a bet on how long you live. If you outlive your official life expectancy, starting benefits late brings you more money. And, obviously, if you die before you start benefits you get nothing.

That’s why it’s worth considering a third option that splits the difference: starting early but socking the money away, allowing it to grow. If you’re lucky, investment gains will offset some of what you lose by receiving less each month.

Benefits depend on your earnings during your working life and, to some extent, when you were born. A person born between 1943 and 1954, for instance, is entitled to a “full” benefit at age 66.

By choosing to receive benefits at 62, this person would reduce the monthly payment by 25%, receiving, for example, $750 instead of a full $1,000. Postponing the start to age 70 would increase the payment to $1,320.

The idea is to provide roughly the same amount if the recipient lives the expected number of years. A man aged 66 today is expected to live to a little over 83, for instance. If he lived to that age and were entitled to $1,000 a month at 66, he’d receive $189,000 if he had started benefits at 62, $204,000 if he started at 66 and $206,000 if he started at 70, not including inflation increases.

If the recipient died 10 years early, at 73, he’d receive $99,000 if he started at 62, $84,000 if he started at 66 and $47,500 if he started at 70, making the early start a clear winner for anyone who dies young.

But if the recipient lived 10 years longer than expected, to 93, the late start would be best. He’d get $279,000 if he started at 62, about $324,000 with a start at 66 and $364,320 by starting at 70.

That’s why many financial advisors recommend starting as late as possible. People are living longer and longer, and the life-expectancy tables are always a little out of date.

Of course, many people need the benefit as soon as they can get it and can’t afford to wait to 70. But if you can wait, the decision boils down to a bet on how long you will live.

This is where the early-and-invest option is worth considering, because it reduces he penalty for starting early.

The person who lives to the expected age of 83, could start benefits at 62 and invest the $750 per month until age 70. At a 4% return, he would accumulate nearly $85,000, according to the Savings, Taxes and Inflation Calculator. Add that to the $117,000 in benefits to be received over the 13 years from 70 to 83, and the recipient will have $202,000, just $2,000 less than if he’d started at 66.

By taking more risk, he could reach for a higher investment return. Earning 8% a year would produce nearly $100,000 between ages 62 and 70. This, plus the next 13 years’ benefits would come to $217,000, about $11,000 more than if he’d started a 70.

A recipient who lived into his 90s would still do far better starting benefits at 70 rather than 62. But none of us knows how long we will live. Starting benefits early and investing them is an option worth considering if you worry you might not live as long as you hope to. That investment can provide a nice rainy-day fund, or something to leave your heirs.

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