Throughout your life you have been making decisions that influence how long you are likely to live. If you took up smoking at age 12 and never quit, your life expectancy is likely to decline. On the other hand, if you exercise regularly and watch your weight, your life expectancy may increase. As you grow older, all of your life decisions are likely to have an impact one way or another. Of course, you read about the 105-year-old who swears drinking whiskey is the secret to long life[i]but that just proves the point. The risk of making a lifetime of choices is living longer or shorter than you expected.
Social Security can be many things, but one of them is longevity insurance. The Social Security Administration allows you, within reason, to choose when you start to collect benefits. Start early and you receive lower benefits. Wait to collect and you receive more. Although this is simple enough in theory, the actual amount received is a function of actuarial tables and change based on the amount you contribute, what year you were born, and what age you choose to start collecting benefits.
A detailed example can be found on the Social Security Administration’s site: https://www.ssa.gov/planners/retire/1960.html
As an example, if your full retirement age is 67, your Social Security benefit is reduced by:
- About 30 percent if you start collecting at age 62.
- About 25 percent if you start collecting at age 63.
- About 20 percent if you start collecting at age 64.
- About 13.3 percent if you start collecting at age 65.
- About 6.7 percent if you start collecting at age 66.
After age 67 the rate increases until you reach the age of 70 when it flattens out.
Since there is no way to know precisely how long you are going to live, how do you make a rational decision? These days, more and more people age 60 and older are remaining in the workforce. In fact, according to the Bureau of Labor Statistics, more than half of those between the ages of 60 and 64 were working at least part time in 2017. Among those 65 to 69, almost one-third were still working.
Employment does affect your benefits. In 2018, (and the amount will change each year) if you earn more than $17,040 and have not reached full retirement age, the Social Security administration will deduct $1 for every $2 you earn above that threshold. If you earn more than $45,360 the deduction will increase to $1 for every $3 you are paid. Once you reach your full retirement age, you may earn as much as you want and still collect your full benefits.
Each year the Social Security Administration reviews the records of Social Security recipients who work. If the most recent year was one of your 35 highest-earning years (adjusted for inflation), the administration recalculates the monthly benefit upwards.
Consequently, one way to net it out is to assess your general health and your prospects for remaining employed until you reach the age of 70. The following chart illustrates the point neatly.
The social security administration recommends starting the application process 4 months before you choose to start collecting benefits. Since social security is a stream of payments that will not stop throughout your life, you can hedge your bet that you can drink whiskey everyday and live until 105 by starting to collect at the right time. As Psalm 90:12 says
“Teach us to number our days, that we may gain a heart of wisdom.”
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