THE BLOG
08/21/2012 04:37 pm ET Updated Oct 21, 2012

To Defer or Not to Defer (Social Security): That Is the Question

Never has there been a financial decision that more people have screwed up than when to claim Social Security benefits. Approximately two-thirds of the population elects to receive benefits early, at age 62. This decision is typically not based on any type of financial analysis or plan.

Let's assume that your monthly benefit amount at your full retirement age (currently 66) would be $1,000. If you elect to take "early retirement" and start collecting at age 62, you will only receive $750. However, if you wait until age 70, your benefit amount will be $1,320. Your Social Security benefit increases by 8 percent for every year you defer your benefits beyond your full retirement age. That is an incredible deal in today's low interest rate environment. Interest rates on everything else have collapsed, especially on safe/guaranteed investments, but the increase you get for deferring your social security benefits hasn't changed.

So, should you wait until 70 years old to collect? The answer to that is ... it depends. If you are single, the analysis is relatively simple. If you live to the average life expectancy, you will collect the same amount whether you start receiving benefits at 62, 70 or any age in between. If you live longer than average, you would have been better off the longer you waited.

Now, let's consider the decision for married couples. This is where you can get the most bang for your buck by deferring your Social Security benefits. Keep in mind that the surviving spouse keeps the higher of the two Social Security benefits when the first spouse dies. Therefore, you don't have to outlive the average life expectancy, only one of the two spouses has to in order for the deferral strategy to pay off.

Here are the important things keep in mind:

1. Difference in earnings history: The bigger the difference in the benefit amounts between the spouses, the more it makes sense for the higher wage earner to let their benefits roll-up as long as possible (to age 70).

2. Health: Does either spouse have good prospects for longevity? If so, it favors deferring benefits, at least for the higher-earning spouse. On the other hand, if you are both obese chain smokers with chronic medical problems, then you should probably both claim benefits at 62.

3. Difference in age: My wife and I are the same age, so statistically she should outlive me by approximately five years. However, if I was a 66-year-old doctor with a 40-year-old wife who has never worked, then the decision to defer benefits to age 70-years-old is a no-brainer. In this case, deferring benefits for four more year (66-70) means someone is likely to be collecting a 32 percent higher payment for 30-50 years.

4. Income needs: All of this analysis is great, but the reality is that if you can't afford to buy groceries, then you may need to take the benefits as soon as possible, regardless of what the number crunchers say.

One last question to ponder: Does it ever make sense for both spouses to defer their Social Security benefits to age 70? It could if both are close in age, don't need the income before age 70 and are fairly sure that they will live both well into their 80's or beyond, but this is rare.