File For Social Security at 62 or 70: Who Wins?

December 18, 2024 — The subject of when to take Social Security is one of the most hotly debated retirement topics. Although the system was designed for both decisions to be equal, there are plenty of proponents for each approach.

Case Study – High Earners

Let’s explore the following case. Two people aged 76 made the maximum contribution to Social Security during their 35 year working careers. One files for benefits at the first opportunity (62), the other waits to get the max benefit at age 70 We wanted to find out who comes out ahead, and when. So we asked AI to do the calculations for us. The results came back instantly, and judging from the sources they used, they look accurate. Here is what we found:

Total Benefits Received

The person who claimed at 62 started receiving benefits 14 years ago, while the other began 6 years ago:

• Claimed at 62: $2,800/month × 12 months × 14 years = $470,400.
• Claimed at 70: $4,555/month × 12 months × 6 years = $328,000.

Comparison

• Monthly benefit now: $2,800 (62) vs. $4,555 (70).
• Total received to date: $470,400 (62) vs. $328,000 (70).

Key Observations

• The early claimant has received more total money to date due to the longer payment period, but their monthly benefit is much lower.
• The later claimant benefits from higher monthly payments, which may amount to more over if they live long enough.

Deeper Dive – Break-Even Points

Let’s take a deeper dive into life expectancy break-even points.

The life expectancy break-even point is the age at which cumulative benefits for the person who claimed Social Security early (age 62) catches with the one who delayed to the maximum age of 70.

Key Assumptions

• Monthly Benefits:
  • Claimed at 62: $2,800
  • Claimed at 70: $4,555
• Time Receiving Benefits:
  • 62 claimant has been receiving benefits for 14 years.
  • 70 claimant has been receiving benefits for 6 years.
• Difference in Cumulative Totals:
  • At the current age of 76:
    • 62 claimant has received $470,400.
    • 70 claimant has received $328,000.
    • Difference: $470,400 – $328,000 = $142,400 advantage for the 62 claimant.
• Annual Difference in Benefits:
  • $4,555 – $2,800 = $1,755/month, or $21,060/year.

Break-Even Calculation

To determine the break-even age:

• AI used a very complicated formula (we won’t show it here) to come up with 6.76 years for when the late claimer to break even.
• Add this to the current age of 76: Age 83.

2 Lower Earning Workers

Here’s the same analysis for two workers who made the minimum Social Security contributions over their 35-year careers, assuming the same conditions as before:

Assumptions:

1. Minimum Wage Contributions:
   • The workers earned at or near the federal minimum wage over their 35-year careers, resulting in Social Security benefits at the lower end of the spectrum.
   • For simplicity, we estimate their monthly benefit at Full Retirement Age (67) to be approximately $1,000/month, based on Social Security Administration (SSA) data for low-wage earners.
2. Claiming Ages:
   • Worker 1: Claimed benefits early at age 62, resulting in a 30% reduction in monthly benefits (~$700/month).
   • Worker 2: Delayed benefits until age 70, resulting in a 24% increase in monthly benefits (~$1,240/month).

Total Benefits Received:

At Age 76:

• Worker 1 (Claimed at 62):
  • Monthly benefit: $700.
  • Total years of benefits: 14 years.
  • Total benefits: $700 × 12 months × 14 years = $117,600.
• Worker 2 (Claimed at 70):
  • Monthly benefit: $1,240.
  • Total years of benefits: 6 years.
  • Total benefits: $1,240 × 12 months × 6 years = $89,280.

Break-Even Age Calculation:

1. Difference in Cumulative Benefits at age 76:
   • Worker 1 has received $117,600.
   • Worker 2 has received $89,280.
   • Difference: $117,600 – $89,280 = $28,320.
2. Annual Difference in Benefits:
   • $1,240 – $700 = $540/month, or $6,480/year.
3. Break-Even Age:
   • Divide the difference in cumulative benefits by the annual difference and AI comes up with 4.37 years.
   • Add this to the current age (76): 76+4.37? Age 80.

Results:

• At Age 80, Worker 2 (who delayed claiming) surpasses Worker 1 (who claimed early) in cumulative benefits.
• Beyond 80, Worker 2’s higher monthly payments continue to compound their financial advantage.

Overall Observations – Claiming Early vs. Delaying

• Claiming early benefits is better if you have shorter life expectancy
• Delaying benefits is advantageous for those with longer life expectancy or other income sources during their 60s.
• Note that lower earning individuals have an earlier break-even point than higher earners (80 vs. 83)

Additional Considerations

• Longevity: If life expectancy is below 83, claiming earlier might be advantageous. For those with a longer life expectancy, delaying Social Security maximizes lifetime benefits.
• Immediate financial needs. If you don’t have any other source of funds, claiming early might be advantageous.
• Cost of Living Adjustments (COLAs): Actual break-even points might vary depending on annual COLA increases, as higher benefits for the 70-claimer compound more significantly over time.
• Spouse Life Expectancy: A surviving lower earning spouse receives the higher earner’s benefit, so any longevity equations should factor this in. If the lower earner is younger, that could be a big consideration.

How These Calculations Were Made

The estimated maximum Social Security monthly benefit for our 76 year old in 2024 is:

Approximately $4,555 for those who claimed at 70 (24% increase from FRA).

$3,822 for those who claim at full retirement age (67).

Sources Used in These Calculations

The calculations for Social Security benefits were based on the following sources and general assumptions:

1. Social Security Administration (SSA) Publications:
   • The SSA provides specific details about benefit amounts for those who earn maximum or minimum contributions. These include adjustments for claiming early or delaying benefits:
     • Benefits at 62 are reduced by up to 30% compared to Full Retirement Age (FRA, usually 67 for most workers born after 1960).
     • Delaying until 70 increases benefits by 8% per year after FRA, up to 24%.
   • SSA Benefit Formula and Factors
2. 2024 Social Security Maximum Benefit Data:
   • The maximum monthly benefit for high earners at FRA in 2024 is $3,822. This value informed the benefits for those who made maximum contributions.
3. Minimum Contribution Estimates:
   • Workers with minimum contributions are estimated to receive about $1,000/month at FRA, based on SSA data for low earners. This informed the calculations for low-income scenarios.
4. Social Security Life Expectancy Data:
   • The average life expectancy for retirees is used to estimate break-even points. For example, SSA estimates that a retiree at 67 typically lives to their mid-80s:
     • Life Expectancy Tables
5. Cost-of-Living Adjustments (COLAs):
   • While COLAs can influence total benefits, the calculations assume static 2024 benefit values for simplicity.

For precise and personalized benefit estimates, SSA’s Retirement Estimator or a Social Security benefits calculator can be used.