The benefit amount you will receive from Social Security will be based on your work and earnings history as well as the age at which you start your benefits. For example, assume that an individual born in 1952 had a work and earnings history that would generate a monthly benefit of $1,000 when started at the earliest possible age of 62. The following table shows how that benefit amount increases for each year that he delays the start of his benefit.
The longer you delay the start, the larger your benefit will be. Pensions and many income annuities are based on the same principle. Pick an early start age and your income amount will be less; delay the start age and you’ll receive a larger lifelong income.
Like pensions and fixed income annuities, Social Security is not an investment vehicle. It is very specifically designed as an income vehicle for the purpose of providing you a lifetime income. However, it might be of interest to consider how large of a balance you would need to have in an investment account in order to generate the same income provided by Social Security.
Assuming the investment “could” support a cash flow to you of five percent of the balance annually, the table below shows the approximate balances you would need in order to match the same Social Security income amounts referred to in the prior table.
When you look at it this way, you could say that if you did not have Social Security, you would need to accumulate an investment balance of $239,940 by age 62 in order to generate a monthly income of $1,000, assuming that investment vehicle would support a five percent cash flow. Or, by age 70, your investment vehicle would need a balance of $422,284 to support a monthly income of $1,760, assuming a five percent cash flow.
One way to look at the difference between starting your Social Security benefit at age 70 and starting it at age 62 is that the extra $760 ($1,760 - $1,000) of monthly income you receive is like having an extra $182,354 ($422,294 - $239,940) in an investment account.
Whether the strategy of starting a lower benefit early or the strategy of starting a larger benefit later appears best mathematically will depend on the assumptions you use: how long you expect to live, what rate of return you expect to earn on your investments, the level of future cost of living adjustments, and even the tax rates you assume you must pay.
Because these assumptions — especially regarding how long we will live — can be highly inaccurate, the best we might do is to guess which strategy would be best.
Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.