Social Security benefits depend on the age you claim them: if you claim at 62, benefits are permanently reduced to 70% of the amount you would have gotten if you claim at full retirement age of 67, if claimed at 63 - 75%, 64 - 80%, 65 - 87%, 66 - 93%, 67 - 100% (duh!), 68 - 108%, 69 - 116%, 70 - 124%.

So, postponing to claim Social Security benefits results in bigger monthly payment, and thus bigger spousal/survivor payments, and - if one lives long enough - bigger lifetime amount received.

Indeed, common wisdom says - “hold off as long as you can afford it”; see:

Although some people who actually did calculations did not find support for postponing:

So, let’s crunch some numbers and see for ourselves :)

In the following, we assume that the potential claimant has invested savings to live off of, so the question we are asking is: “when is it better to postpone claiming Social Security benefits and draw on the savings instead than to claim as early as possible, thus letting the equivalent amount of investments to (hopefully) grow undisturbed?”.

We ignore two additional considerations:

  • retiree who works while receiving Social Security benefits has the benefits reduced; we ignore this because this reduction is not permanent: upon reaching full retirement age benefit payment is adjusted to compensate for the reductions;
  • portion of Social Security benefits that is taxed as income is never more than 85%, making claiming Social Security benefits more tax-efficient than drawing on invested savings; we ignore this for simplicity ;)

When claiming Social Security benefits is postponed beyond the earliest possible age of 62, while the future benefit amount growth, you are receiving nothing in the meantime, and have to draw on your invested savings, depriving the portion you spend of growing opportunities.

Once you eventually do claim the benefits, it takes years for accumulated increased payments to catch up with the investment growth you lost by not claiming the benefits at the earliest opportunity; the age you will be when (if) that happens is break-even age.

Common sense suggests that happiness one can by with money diminishes with age: it is better to have money for travel, dining and toys in your sixties than in your nineties; studies of the spending patterns of retirees confirm this. So, while you are catching up, you have less money than what you would have if you claimed early - and by the time you do catch up (if you ever do) the money are no longer that valuable.

On the other hand, health-related expenditures are likely to increase with age, so maximising total life-time benefits helps offset them.

Table below shows break-even age depending on:

  • the age you claim Social Security benefits end
  • annual growth of your investments.

It also shows, for each age benefits are claimed, what is the percentage of the total amount of benefits received at age 95 of the amount received when claiming the benefits late, at age 70.

age claimed: 62 63 64 65 66 67 68 69 70
portion of the benefits when claiming at 67: 70% 75% 80% 87% 93% 100% 108% 116% 124%
total at 95 compared to claiming at 70:
growth		 75% 77% 80% 84% 87% 90% 94% 97% 100%
0% 62 77 78 78 78 79 80 80 81
1% 62 79 80 79 80 80 81 81 82
2% 62 80 81 81 81 82 82 82 83
3% 62 82 83 82 82 83 83 84 85
4% 62 84 86 84 85 85 86 86 87
5% 62 88 90 88 88 89 89 89 90
6% 62 95 99 93 93 94 94 94 96
7% 62 x x 108 106 109 106 107 110
8% 62 x x x x x x x x

Interestingly, if you did not claim the benefits at 62 nor 63, it makes sense to not claim them at 64 either, and instead claim them at 65.

If you do not claim your Social Security benefits at 62, you will be at least 77 by the time you break even - assuming market does not grow at all; at least 82 with 3% market growth; at least 93 with 6% growth; with 8% growth you will never catch up. Historically, average annual market return is around 10%.

Total benefits received at age 95 do increase as a result of postponing the benefits: the amount when claiming early, at age 62, is 75% of the amount when claiming late, at 70.

The answer to our question “when does it make sense to postpone claiming Social Security benefits and live off of your investment savings instead” seems to be clear: never :)