When should you claim Social Security?
The optimum date for starting retirement benefits is the subject of much debate and analysis. For most people, however, it’s a simple matter of when they need the cash—and, indeed, many folks claim as soon as they’re age 62 and eligible. The experts can run models all they want. But when it comes to Social Security, it seems necessity and emotion rule.
One thing is clear, though: There’s no validity to taking your benefits as soon as possible, and thereby ending up with a permanently lower monthly benefit, simply because you believe Social Security won’t be there for you. Congress has failed to heed warnings from the program’s trustees for nearly 35 years. Still, Social Security isn’t going anywhere. Take a look at the conclusion on page five of the latest annual report: Even when its trust fund is depleted, Social Security will still be able to cover 77% of scheduled benefits.
I love this quote from a recent article: “If you’re healthy and expect to live a long time, you should maximize benefits received late in life by delaying” the start of Social Security benefits. The problem: How could you possibly know to expect a long life?
If you have the fortitude to look, you might try the handy life expectancy calculator on Bankrate.com. If not, consider the Social Security Administration’s actuarial tables: At age 62, the life expectancy for a male is 21.6 years, at age 65 it’s 17.9 years and at 70 it’s 14.4 years. A female lives two to three years longer, on average.
But many Americans will beat those odds. “The 85 and over population is projected to more than double from 6.4 million in 2016 to 14.6 million in 2040,” says the Department of Health and Human Services. Remember, once retired, a stock market decline, falling bond prices and rising inflation aren’t your biggest problems. Instead, it’s longevity—and hence the risk you’ll outlive your money. A larger Social Security check helps protect against that risk.
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Here are five pointers:
1. Don’t go through your working life thinking Social Security will be enough for a comfortable retirement. Be sure to fund your 401(k) and IRA.
2. Have a contingency plan in case your Social Security benefit is smaller than you had hoped. What if you’re unable to work because, say, you suffer a disability or lose your job—and that means a more modest Social Security check? You should still be in good shape for retirement, provided you start saving in your 20s.
3. When in doubt, go for the larger Social Security benefit. Sketch out a strategy to meet this goal. That may involve working longer or following the Boston College approach.
4. Consider survivor benefits in your plans. Typically, a surviving spouse will receive the deceased worker’s full benefit—which is a big incentive for the family’s main breadwinner to delay claiming Social Security.
5. Investigate Social Security filing strategies several years before your planned retirement. As in all things to do with retirement, time is both your ally and your enemy.
How to figure out when to claim Social Security
How much of a haircut will you take if you claim Social Security early? To find out, you need to know your full Social Security retirement age—a crucial piece of information, especially if you’re married and trying to figure out the best strategy for claiming benefits.
If you were born between 1943 and 1954 and hence your full Social Security retirement age is 66, your benefit will be reduced by 25% if you claim benefits at age 62, 20% if you claim at 63, 13.3% at 64 and 6.7% at 65.
If you were born in 1960 or later and hence your full Social Security retirement age is 67, your benefit will be reduced by 30% if you claim benefits at 62, 25% if you claim at 63, 20% at 64 and so on. For those born between 1955 and 1959, the reduction will fall somewhere between these two numbers.
What if you claim benefits after your full retirement age? Your benefit will increase by 8 percentage points for every year you wait. These are known as delayed retirement credits. For instance, if your full retirement age is 66, at which point you would be eligible for $1,000 a month, you could receive $750 if you claim at 62 or $1,320 if you claim at 70—a difference of 76%. Similarly, if your full retirement age is 67 and you’ll be eligible for $1,000 at that point, you could receive $700 at 62 or $1,240 at 70—a difference of 77%. These figures don’t reflect any increases because of inflation.
If you live to an average life expectancy, you should—roughly speaking—find that you fare equally well no matter when you claim benefits. This “actuarial equivalence,” however, doesn’t take into account three valuable benefits that tilt the argument in favor of delaying: spousal benefits, survivor benefits and the financial safety net that Social Security provides in case you live longer than expected.
A new study from United Income, a technology wealth management company, finds that for most people it’s not really a question of if you’ll be able to retire. It’s more a question of when to take Social Security. And unfortunately, too many workers arrive at the wrong answer to that question.
Their research shows 57% of retirees would be better off taking Social Security at age 70 than at any earlier age. Most people, however, claim at age 62, which is the earliest you can possibly take Social Security.
But taking it that early means you only get a partial benefit. By waiting, you instead get a buildup in benefit of about 8% every year until your benefit caps out at 70.
Here are some other findings from the United Income research:
– $111,000 is the average income per household that you forfeit by claiming Social Security too early
– Claiming at the wrong age means forgoing $68,000 in estimated wealth
– Only 4% of retirees claim at the optimal time
When Is the Best Time to Take Social Security?
Social Security calculators (the key is your life expectancy):
– Life Expectancy Calculator, from SSA
– How Long Will I Live? from Univ. of PA
– Maximize My Social Security from Laurence Kotlikoff
– Target Your Retirement, from Ctr for Retirement Research
– Social Security Quick Calculator from SSA
– Retirement Estimator from SSA
– SmartAsset
– Social Security Calculator from BankRate
– Social Security Resource Center, from AARP