Social Security: Why Wait?

Marshall Rathmell |

Caveat: Personal finance is personal. Your individual facts and circumstances will have a huge impact on when YOU should claim your social security benefits. This blog post provides a starting point for making that decision, and plenty of exceptions exist to the rule. 


The Marshmallow Experiment


You have probably heard of the marshmallow experiment. It was a study done at Stanford in the 1970s on delayed gratification. In this study, a 4- to 5-year-old child had a marshmallow placed on the table in front of them and was then offered a deal. The researcher explained that they would leave the room for 15 minutes and if when they came back the marshmallow was still on the table the child would be rewarded with a second marshmallow, but if the child ate the marshmallow early, they would not get a second marshmallow. 


The experiment, as I’m sure you can imagine, provided entertaining video footage of the children trying to decide what to do next. 


Less entertaining, but more interesting, is what the follow-up studies with these same children revealed over the next 40 years. The children who demonstrated an ability to delay gratification scored better on several general life measures (SAT scores, substance abuse, obesity, social skills). Delaying gratification looks to be one of the most important characteristics for success in health, work, and life.  


S’more Benefits?


Social Security benefits work in a similar way to the marshmallow test. If you can delay claiming benefits, then you are rewarded with a larger benefit each year that you wait. If you can wait until age 70, you will maximize your annual benefit amount. However, if you claim early, you get a permanent reduction in the benefit amount. 


Let’s look at some numbers to highlight how big of a difference this can make to your retirement success.


If you claim your benefits at the earliest possible age, usually age 62, then your benefit is reduced by 30% compared to if you waited until the full retirement age of 67. Each year you wait beyond your full retirement age results in roughly an 8% increase in benefits until you hit your max benefit at age 70. The difference between your age 70 benefit and age 62 benefit is over 77%! Not quite a whole 2nd marshmallow, but close. 


There are obvious exceptions to this, always being the best strategy. The biggest one being your life expectancy. If you begin benefits eight years earlier, even if it is a smaller benefit amount, it will take several years for the larger benefit at age 70 to catch up in terms of lifetime benefits received. We call this the breakeven point, and it is typically around age 80 for an unmarried retiree. 


According to the Social Security Administration’s 2022 Trustees Report, the total life expectancy for a 62-year-old female is 85.1 and for a male, it is 82.3. This means making the decision to delay benefits until age 70 results in the highest lifetime benefit amount for many retirees. 


For a married couple, the odds of surpassing the breakeven point are even more in your favor, because when one spouse passes away the surviving spouse is entitled to continue to receive the higher of either their own or their deceased spouse's benefit payments. This usually results in the optimal decision being to delay benefits as long as possible for the spouse with the higher benefit amount, and the lower-earning spouse claiming at either age 62 or 70 depending on their health and financial situation.


In summary, the best way to maximize the amount of money you receive in Social Security benefits is to delay filing as long as possible and to live as long as possible. Eating the “marshmallow” of early Social Security benefits, or the marshmallow of questionable health benefits, might both be something best avoided as you approach retirement age.