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When should a person apply for their Social Security retirement benefit?  There are a lot of different viewpoints on this question, and the answer that is most often given is an answer that many of us in Human Resources are familiar with “it depends”.  This article will look at those things on which your answer depends.

So, what’s an article on Social Security doing in a newsletter about the Thrift Savings Plan?  Both the TSP and Social Security are parts of what many call your “retirement income triangle”.  If you take Social Security early, you will likely take less out of your TSP in the early years of retirement and need to take more out in the later years.  Decisions you make about one source of retirement income almost always affect decisions you make about other sources.

Let’s now look at the thing upon which your decision on applying for Social Security will depend.  The primary thing on which it will depend is the size of the Social Security retirement benefit that you will receive.  The earlier you apply for Social Security, the smaller your benefit will be.  When Social Security computes your benefit, they calculate what you will receive at your “full retirement age” (FRA).  Benefits taken before you reach your FRA are reduced and those taken after you reach your FRA are increased.  In the examples that follow, we will use the full retirement age of 67 – the FRA for anyone who was born in 1960 or later.

We’ll start by assuming that our intrepid applicant (IA) will receive $1,000 per month if they apply when they attain the age of 67.  Don’t panic!  It’s almost certain that all readers of this article will have an FRA benefit that is far north of $1,000 a month; I just prefer to use round numbers for examples.

For early applications, benefits are reduced 6 2/3% per year for the first three years prior to the FRA that benefits are claimed.  Three years in advance of age 67 is 64.  At age 64, rather than $1,000 a month, IA will receive $800 per month.  For years further out than three, the reduction is 5% per year, so, if IA applies at age 62, the monthly payment will be $700.

On the other hand, if IA waits past their FRA to apply, their benefit will be increased by 8% per year up until the age of 70.  There is nothing to be gained by waiting past the age of 70.  An 8% increase for three years would result in a monthly benefit of $1,240.

The benefit grows from $700 to $1,240 over a period of eight years!  Sounds like a good deal until you realize that, had you applied at 62, you would have been receiving something for those eight years.  By waiting until 70, you received eight years of nothing.

When will a person “break even” if they delay receipt of their benefits?  The break-even period is in the vicinity of twelve years.  If IA waits until age 70 to apply, they will be 82 when they have collected enough of the higher benefit to have caught up to the amount they would have already collected had they chosen to apply at 62.

There are two schools of thought here.  One school is made up of financial writers, who will encourage you to wait until age 70 to apply.  They say that, if you live to your life expectancy, you will come out ahead in terms of dollars and cents – and that is true.

The other school is made up of those who wonder if they will reach their life expectancy.  This group firmly believes that a bird in the hand is worth two in the bush.  Although 62 year olds are rarely called young, they’re still younger than 82 year olds, or even 70 year olds, and will be better able to spend the money on themselves.  This group is also made up of those who need the money to live on.  What good will a higher amount in the future do them if they actually need the money today to make their budget work.

This discussion does not even consider the Social Security earnings test, which affects those who work while collecting Social Security up until they reach their full retirement age.

Social Security statistics tell us that far more individuals apply at the age of 62 that at the age of 70.  Which group will you be a member of?

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