This article was updated on Jan. 6, 2017.
Most retirees believe it's best to wait as long as possible before applying for Social Security. But is this really the smart thing to do? Surprisingly, the answer is often "no."
It's understandable if you're one of the many Americans who think it pays to wait, as the size of your monthly benefits does indeed depend on when you begin receiving checks. If you do so at the earliest possible moment -- that is, the month after turning 62 -- then your monthly take will be 25% to 30% less than it would have been had you waited until your full retirement age.
Meanwhile, if you wait beyond your full retirement age, then you'll receive delayed-retirement credits that boost your benefit checks by 8% for every year you delay them up until age 70, when your benefits max out. The net result is that you could end up receiving 24% to 32% more each month than your primary insurance amount (what you're entitled to at your full retirement age) and 76% more than you'd get by taking benefits at age 62.
But while these numbers are impressive, there's more to this cost-benefit calculation. This is because there's a large cost associated with waiting: If you start receiving benefits at 62 as opposed to 70, then you get monthly checks for eight more years. The question, in turn, is whether (and, more specifically, when) the cost of waiting outweighs the benefit of a higher but delayed monthly check.
This is known as a breakeven analysis. And while there are calculators for this purpose online, here's the gist of it: If you expect to live past 77, then you should consider waiting until full retirement age to begin collecting benefits, as this is the point when the gain from waiting overtakes the cumulative cost -- see point "A" in the above chart.
Moreover, if you live past 82, then you'll receive more in lifetime benefits if you wait until you're 70 years old to claim Social Security. The rationale is the same: By that point (see "B" in the chart), your cumulative benefits from waiting will add up to $206,000 compared to $204,000 had you elected to receive benefits at 66 and $189,000 had you begun drawing from the system at 62 -- this is assuming a primary insurance amount of $1,000.
But here's the thing that's important to keep in mind: The average lifespan of an American is 79.8 years old. And for men, it's only 77.4 years compared to 82.2 years for women. Thus based on age alone, particularly for males, it may not be as smart as you first think to hold out for larger Social Security checks.
It's also worth pointing out that, according to a government report, "The Social Security benefit formula adjusts monthly payments so that someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim."
Now, just to be clear, there are a number of additional variables that should factor into one's decision about when to apply for benefits. If you're planning to work between the ages of 62 and 66, for instance, the scale tips in favor of deferment, as wages above a certain threshold will erode your Social Security benefits until you reach full retirement. And the same can be said if you have a spouse or other dependents that are likely to outlive you. The net result would be to extend the life (and thus the value) of your cumulative benefits.
Nevertheless, the point here is that if you find yourself in a position to apply for benefits early, rest assured that there's little reason not to.
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