Readers had two questions about my recent column on taking my Social Security benefits. Most readers wanted to know why I had waited so long--- several months after my 68th birthday. After all, they argued, it would take years to recoup the benefits I had deferred.

A smaller group had the opposite question: Since I have advocated delaying benefits, why hadn’t I gone for the maximum and deferred until age 70?

Here’s the answer.

In general, it is good to defer taking Social Security benefits if it is financially possible. This is particularly true if you are still earning wages between the age of 62 and your full retirement age. Your full retirement age depends on the year you were born.

For me, born in 1940, full retirement age was 65 years and 6 months. If you are turning 65 this year and were born in 1943, your full retirement age is 66. It will remain age 66 for everyone born between 1943 and 1954.

In the period between age 62, when you can take Social Security benefits early, and your full retirement age, income earned in wages can cause you to have to return your Social Security benefits. This year the limit on earned income is $14,160. For every $2 over that amount, your benefits will be reduced by $1. So if you earn $42,480, every dime of your benefits will be taken back. Since I earned more than $42,480, there was no point in my taking benefits until I reached my full retirement age.

Once you have reached full retirement age, you can have unlimited earnings and there will be no reduction in your Social Security benefits. If you earn very much, however, your benefits become subject to income taxes. That’s a good reason to continue benefit deferral if your income from other sources is adequate.

Most people imagine that they won’t live long enough to recoup the benefits they lose when they delay taking them. In fact, this is not true.

Each year that you delay taking benefits beyond full retirement age, your basic benefit will increase by about 8 percent. (It will also be adjusted upward for inflation.) This means that you will recover, in dollars of constant purchasing power, a year of deferred benefits in 12.5 years.

If you live only 12.5 years, deferring benefits is a push---you get the deferred benefits back, but you don’t come out ahead. The only way to “win” is to live longer than 12.5 years. If you check the life expectancies at different ages from the table below, you’ll see that white men, white women, and black women are likely to live substantially beyond 12.5 years at any age between 65 and 70. Coming out ahead is less likely for black men because their life expectancy is only 12.4 years at age 70.

Another way to come to the same conclusion is to calculate the percentage of people in any group who will still be living 12.5 years later. For every 100,000 white males born, 80,450 can be expected to live to age 65. About 56,408 can be expected to live 12 years, and 53,601 can be expected to live 13 years. In other words, more than two of every three white males can expect to “win” their bet and recoup their deferred benefits. The life expectancy of the two-thirds who survive is more than 9 years. Those are good odds, with a good payoff. 

Most Americans Will Recoup Deferred Social Security Benefits

This table shows the life expectancy, in years, for each year between ages 65 to 70 for the white and black populations, of each sex, in the United States. Since it only requires 12.5 years to recoup a year of deferred benefits, most Americans would benefit from deferral.

Age White men White women Black women Black men
65 17.2 20.0 18.6 15.2
66 16.4 19.2 17.9 14.6
67 15.3 18.5 17.2 14.0
68 15.1 17.7 16.6 13.5
69 14.4 17.0 15.9 12.9
70 13.7 16.2 15.3 12.4

The deal is sweeter still for men who are married. Why?

Even if they don’t live long enough to recoup the deferred benefits, their widows certainly will. A paper from the Boston College Center for Retirement Research, for instance, indicates that the optimal age for maximizing benefits is for a younger and lower-earning spouse to take them at age 62. Her higher-earning and older husband should take them at age 68 or 69. That is what I did.

I also had another reason to take benefits this year, at age 68. Even though the benefits will be subject to the federal income tax, most of the net cash will be invested. Given the 50 percent decline of the domestic stock market, there is a good chance the additional savings will provide a higher return than another year of deferred benefits.

On the web:

February 20, 2009: A Meditation on McDonald’s

Column collection on Social Security:

January 29, 2006: Fine Tuning the Social Security Benefits Decision

Boston College Center for Retirement Research: Why Do Women Claim Social Security Benefits So Early?

2004 CDC life expectancy tables

Reduction of benefits for earnings over limit

Social Security page on full retirement age

Social Security page on benefit increase for delay