Chances are, if you were offered a deal that could pay you 30 to 80 percent more income, you’d be mighty interested. But when it comes to the decision about when to start taking Social Security benefits in retirement — which does in fact give you the ability to lock in much higher payments — it turns out that about two-thirds of retirees opt for much lower payments.
And in a world where very few private-sector workers are going to have a company-provided pension to fall back on in retirement, maxing out your Social Security benefit is more crucial than ever. Yet in a recent AARP survey that quizzed Americans on their knowledge of claiming strategies, on average respondents just got 50 percent of the answers right. In school that’s called an F.
The Basic Conundrum
Retirees can begin to collect a monthly Social Security paycheck beginning at age 62. But the size of the benefit at 62 is reduced from what it would be at your Full Retirement Age (FRA). For anyone born in 1960 or later, FRA is age 67. (It’s somewhere between 66 and 67 if you were born between 1943 and 1959).
If your FRA is 67 and you start taking benefits at 62 your payment will be 30 percent less than what it’d be if you began taking payments at 67. Moreover, if you were to wait until age 70 to start taking your benefit, it would be 124 percent of what your age 67 payout would be. The bottom line: Social Security reduces the size of your benefit if you start before your FRA and increases your benefit if you wait up to three years after your FRA.
The Government Pays You to Wait
If your FRA is 67 you will be paid an extra 5 percent or so each year between age 62 and 67 you wait. That’s a guaranteed increase. Now a common question is whether it makes sense to start claiming a benefit at age 62 and just invest it yourself. That’s a personal decision, but there is no risk-free investment today that will pay you anywhere near 5 percent a year. And c’mon, are you really sure you will have the discipline to take the Social Security payment each month and invest it?
Once you reach your FRA, the annual “wait” payoff gets even sweeter: it’s 8 percent a year from age 67 through age 69. Again, right now there is absolutely no risk-free investment that can give you a guaranteed 8 percent annual gain. But Social Security does just that if you delay starting your payout past age 67. By the way, once you turn 70, there’s no additional bonus payments for waiting longer.
Focus on Living a Long Life, Not Dying Young
OK, here’s an obvious drawback: if you delay starting to take your Social Security benefit at age 62 but you die before your FRA, or you die before age 70, then you’ve essentially “lost” out on collecting Social Security. Of course, if you have reason to believe you will not live past around 80 or so, then early claiming can make plenty of sense. But here’s the key statistic to keep in mind: 50 percent of male 65-year-olds today will still be alive at age 82, and 50 percent of female 65-year-olds today will still be alive at age 85. Put another way: there’s a 50 percent chance you’ll still be alive well into your 80s (and beyond.) That should be front and center as you make your decision on when to start claiming Social Security.
Waiting Is Like Buying Extra Income
Rather than focus on what you can get at age 62, step back for a second and ask yourself: Would I like to know that my ultimate Social Security benefit will be significantly higher if I am fortunate enough to live a long life? Significant here is 30 percent if you wait until your FRA and more than 75 percent if you wait to age 70 rather than claiming at age 62. For many of us, the answer is a resounding yes. In that case, delaying makes terrific sense.
That doesn’t mean you have to delay your retirement. One option is to tap other retirement assets in your 60s, rather than leaning on Social Security. Or maybe you dial down to a part-time job in your 60s that will bring in the equivalent of the reduced Social Security benefit you’re not going to take. For example, this year the average monthly Social Security retirement benefit is $1,200. So if someone today were to delay Social Security, but wanted to “replace” that benefit, they’d be looking at finding part time work that brought in $1,200 or so a month. (At ssa.gov you can get a real-time estimate of your benefit if you were to begin at age 62, your FRA and age 70. The AARP also has a Social Security calculator that shows you different scenarios to help you make the best decision.
Claiming Strategies for Married Couples
Married couples have a few options. They can both claim their own benefit based on their own earnings record. Or the spouse with the lower lifetime earnings can instead opt to draw a benefit equal to 50 percent of their spouse’s higher benefit. For households where there is a wide disparity in lifetime income, the smartest strategy is for the higher-earner to delay claiming until age 70. That not only ensures the highest possible benefit when he or she reaches age 70 but it also ensures that the surviving spouse will be left with the highest possible Social Security benefit.
While the high-earner should delay, the other spouse can go ahead and start claiming a benefit whenever desired. That benefit can even be based on the other spouses Social Security record. Then when the higher earner reaches age 70 he or she starts collecting that maximum benefit.
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Image used under Creative Commons by Flickr user 401K.