Planning for retirement does not have to be complicated. Social Security benefits frequently confuse retirees due to a lack of clear information. The most common question retirees have to ask is "When should I file for social security benefits?" While the answer depends on a couple of other questions, there is an easy way to guide each person through the process in only a couple of minutes. This is the easiest way to determine if you should file for social security benefits.
Social Security is simply a series of cash flows from the initial claim date until death. Attempting to find the present value of the cash flows doesn't work because the retiree can't be sure how long they will live. On the other hand, the retiree may feel comfortable making a rough guess about their lifespan based on family history. If you can come up with a rough estimate of how long you expect to live, the following charts will help you find the ideal age for filing.
There is another thing you'll need to know before finding the right age for filing. Do you know what year you were born? Great, you're well on your way. The charts will be broken up based on the year you were born. They need to be organized that way because the government created different rules for social security payments depending on the year you were born.
Your PIA is your "Primary Insurance Amount." It is the value social security payments will be based on. Each person has their own number for the PIA, though married people may find their spousal benefit is worth more than their own benefit. Regardless of your PIA value, the following chart demonstrates what percentage of your PIA will be paid each year:
The percentage of the PIA the retiree receives depends on both the retiree's age when they file for social security and the year they were born. Find the year you were born on the left hand side and you can see the percentage of your PIA that you would expect to receive based on your age when you file for social security benefits.
While that chart is readily provided by the Office of Social Security, it doesn't give a retiree enough information in the right format for them to easily make a decision. The following charts are designed to provide that level of clarity. Follow along through the first example and you'll be ready to jump to your own year of birth.
Were You Born Between 1943 and 1954?
If you were born before 1943, you should have already filed. If you were born between 1943 and 1954, you can use the following chart to assess how long you would need to live to make it worthwhile to delay filing. The chart is also broken down based on what interest rate the retiree feels is appropriate for discounting future cash flows:
If an investor wants to look at a simple payback period with the assumption that current cash flows earned no interest, then they would use the top line. The discount rate applied in this case is 0%. As the retiree moves down the chart toward the lower rows, the discount rate is increased to 6% per year. Given the very low interest rates offered today, it would be very difficult to justify a high interest rate unless the retiree has personal loans outstanding that bear a high rate of interest.
If the retiree uses 2% as the relevant discount rate, then waiting until 63 to file would lead to a breakeven age of 81.01. The interesting thing for many retirees is that the discounted breakeven age does not change in a linear manner. The following chart demonstrates the increase a retiree would see in their cash flows for each additional year that they delay filing:
Since the retiree born between 1943 and 1954 sees an increase of 6.67% for waiting until 63 but an increase of 8.33% for waiting the following year, it would make a great deal of sense for them to wait until at least 64 in many scenarios if they believe they will live to be older than 79.19. Of course, if the retiree has a much higher rate of interest that is applicable for them, then it would encourage them to file at a lower age.
To further simplify the changes in the breakeven age, the following chart shows the change in the breakeven age for each additional year the retiree waits to file:
Since the first breakeven age is calculated based on filing at 63, the values must be zero. Based on waiting until 64, the breakeven age decreases at each discount rate of 6% or below. Waiting until 70 always has the longest breakeven time.
The section below will be split up based on the year of birth so the retiree can easily calculate their breakeven age based on the interest rate they are using to discount flows. To be perfectly explicit, so long as the retiree is accurate in choosing the discount rate that is appropriate for them, the discounted breakeven age should be the most efficient way to decide when to file for social security benefits. If the retiree lives beyond the breakeven age, then you win by collecting a higher present value of cash flows.
Were you born in 1955?
The following chart will provide the relevant ages for the discounted breakeven point:
Were you born in 1956?
If you were born in 1956, then this is the applicable chart for you:
Were you born in 1957?
For people born in 1957, there is a fairly strong case for delaying until at least 65. The discounted breakeven age bottoms out at 65 unless the retiree is using a rate below 1%.
Were you born in 1958?
People born in 1958 are the first group to see the breakeven age increase slightly at 64 for the lower interest rates. On the other hand, waiting until 65 is lowering that breakeven age.
Were you born in 1959?
For people born in 1959, the trend of a decreasing breakeven age for waiting until 64 is entirely gone. If the retiree is waiting until 64, it makes a great deal of sense to try to wait until 65.
Were you born after 1960?
Being born into the last segment isn't so bad. The normal retirement age for full benefits kept increasing and is 67 for this group but the age for discounted breakeven is still very similar to the 1959 group and in some cases it is lower.
Is it Worth Waiting?
The question can be boiled down to assessing what rate the investor believes is appropriate and how long they expect to live. Since running out of money in retirement is a terrible experience, it would be wise for retirees to plan on living longer than they expect to live. Remember that technology is constantly improving and average life spans have increased materially over the last several decades. Assuming you won't live to an older age than your parents is a dangerous game. Because social security payments last as long as the investor is alive, they do an excellent job of reducing the risk of outliving your retirement funds.
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If you found the tables helpful in assessing when to file for social security benefits, I would greatly appreciate your sharing it.
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