Math with Dick and Jane: Should Jane collect Social Security as soon as she turns 62?
If you are getting close to retirement and you have been contributing to Social Security, perhaps the most important decision you can make is when to start collecting your payments. The Social Security Administration gives you a choice, you can start getting paid a fraction of your benefits as soon as you turn 62, or you can wait until your full retirement age and collect a full payment each month.
While the Social Security Administration gives plenty of guidance on the matter, if you want to make sense of it, you have to do a little work, starting with asking and answering a few basic questions, including the four below:
- When is the earliest I can start collecting? — Age 62
2. When is full retirement age? — That depends on the year you were born:
- If you were born before 1955, that age is 66.
- For those born in 1960 or later, the age is 67.
- If you were born from 1955 to 1959, add two months to for every year after 1954 (or subtract two for every year before 1960. For example, if you were born in 1959, you reach full retirement age at 66 years and 10 months old.
3. How much less will I get if I start my benefits at age 62? — That also depends on when you were born:
- If you were born before 1955, you would get 75% of your benefit.
- If you were born after 1960 or later, you would get 70% of your benefit.
- If you were born from 1955 to 1959, the formula is a bit more complicated. The amount of the reduction depends on how many months there are until you reach your full retirement age. The formula is as follows:
- Less than 36 months from full retirement age — Your benefit is reduced by 5/9ths of a percent (0.56%) for each month until your full retirement age. If it is exactly 36 months, that would be a 20% reduction
- More than 36 months away from full retirement age — Your reduction would be 20% for the first 36 months plus 5/12ths of a percent (0.417%) for the remaining months until full retirement age.
- For example, if you were born in 1959, your full retirement age is 66 years and 10 months. If you started taking payments at age 62, 58 months early, you would get a 20% reduction for the first 36 months, plus an additional 9.17% reduction for the next 22 months for a total reduction of 29.17%. In other words, you would receive 70.83% of your full retirement benefit if you started at age 62.
4. How long would I have to live before the amount of money I get by starting benefits at age 62 is less than if I waited for full retirement age? — Once again, that depends on when you were born.
If you are not yet 62 and want to figure that out, you would need to know the number of months between turning 62 and full retirement age:
- If you were born in 1959, that number is 58 months (four years and 10 months)
- If you were born in 1960 or later, that number is 60 months (five years).
For example, if you were born in 1960 and decided to receive benefits at age 62:
- You would receive 70% of your full benefit payment instead of 100% if you waited until your 67th birthday.
- In other words, in the 60 months between age 62 and your full benefit age of 67, you would be getting the equivalent of (0.70)*60 = 42 full benefit payments.
- You would continue to get 70% of your full benefit payments even after you reach your full retirement age of 67.
To figure out how long before you receive more money from waiting than from starting at full retirement age, you have to answer the following question: If you wait until full retirement, how long before the money you get is greater than the money you would get from starting at age 62?
To put this in an equation, let N equal the number of payments after full retirement age, M the number of months between turning 62 and full retirement, P the percentage of a full payment, and F the amount of a full payment. The total value of payments starting at full retirement (age 67) would be greater than the total starting at age 62 if:
- NF > (P)(F)(N + M)
- Since F is multiplying both sides of the equation, divide both sides by F to get:
- N > (P)(N + M)
- Solving for N gives N > (P)(M)/(1–P), and substituting 60 for M and 0.7 for P gives:
- N > 60(0.7/0.3) = 140
- This means that if you wait until full retirement age, you would start to get more money than starting at age 62 at age 78 and nine months, 141 months (11 years and nine months) after reaching the full retirement age of 67.
Looking at it in a different way with Dick and Jane
A different way to get to the same conclusion is to start with a different story starring the twins Dick and Jane, who were born in 1959 and turn 62 in 2021.
Dick and Jane, born on October 3, 1959 (apparently as a result of their parents celebrating the day Alaska becoming the 49th state on January 3rd of that year) are nearing retirement. Jane is a well-known music producer behind numerous 90’s West Coast gangster rap hits, including the unreleased underground classic “Show Me the Straight Cash Homey.” After a lifetime of roller skating, skydiving, street racing, and general tomfoolery, Jane feels quite shocked that she has survived long enough to collect Social Security. While checking out the Social Security site at ssa.gov one day, she discovered that she can start collecting a fraction of her Social Security benefits when she turns 62, or can hold out until age 66 and 10 months and get 100% of her benefits.
Never one to wait patiently for a payday, she asked herself a question, “What do I lose if I get paid now instead of later?” Looking closely at the Social Security site, she finds out that she would only receive only 70.83% of her full retirement payment if she started collecting benefits when she turned 62. Concerned that she may be losing out on too many dead presidents, she asked her brother Dick for advice.
Dick, who made his money on the outer fringes of the Silicon Valley tech boom, still enjoys working and because of his conservative approach to saving, investing, and spending, is perfectly content to wait until full retirement to start receiving his Social Security payments. Although he loves his sister dearly, he has always been concerned about her financial stability, so he was happy to sit down with her to help her decide what to do.
He explained the situation in a way she would understand: “If you start receiving checks at age 62, for every C-note ($100 bill) you would have gotten if you waited until full retirement, you would only get about $70.83.” “Yeah, so what. It’s still money” she said. Dick continued. “In the 58 months before retirement, you would get $4,108.14.” Once I start getting my check, I’d get the full C-note, an extra $29.17 every month compared to you.
Jane looked a bit distracted, so Dick kicked things up a notch.
“You would start out $4,108.14 ahead of me, but I’d be getting $29.17 more than you every month starting when we are both 66 years and 10 months old. If you divide my extra $29.17 into your $4,108.14, that means in 140.83 months, I’d have as much Social Security money as you.”
Jane looked up from her looking at her latest Tik Tok video with a frown on her face and said “What‘s 140.83 months in English?” Dick replied “If you round it up to 141 months, that translates into 11 years and nine months. Add that to 66 years and 10 months, and that means that when we are 78 years and seven months old, I will have received more money from Social Security than you.”
Finally, things clicked in Jane’s head. Dick in his wisdom told a story in a way that was true to the math and was clearly understood by Jane. Jane smiled at Dick and said “I love you bro, and I see why you want to wait for your check, but are you really going to get that much more money?”
“It depends on how long you and I live, but since I’m getting $29.17 more a month for every $100 of Social Security payment, that means after we hit 78 years and seven months, if I’m getting $1,000 a month from Social Security, I’d get (as Dick squints at his calculator) $3,500.40 more every year.”
Jane was still not impressed. “Dick, I’m not getting $100 a month or $1,000 a month. I don’t even know exactly how much I’m getting yet since I haven’t applied, so I still don’t understand how big the difference is.
Dick thinks for a second and whips out his calculator again. “Let me explain it this way, if we both had the same amount coming to us, but you took yours at 62 and I waited until 67, it would take eight and a half months to make what you would get in 12 months.
“Now that’s a number I can understand, but I’m still not convinced. You’ve been making more money than me for years, but I’ve always spent less than whatever I had coming in so I’m pretty sure I can deal with it. Plus, I wouldn’t bet on making it to full retirement age at 67 and I would bet even less on living past 78, so as soon as I hit 62, I’ll just take the money and run.”
See Jane take the money and run.
Run Jane, Run!