Most people begin taking Social Security retirement benefits at the wrong time. The decision can cost them and their survivors quite a bit of money over their lifetimes. It’s not surprising. Several factors must be considered to make the right choice, and some key elements changed over the years.
A majority of people claim Social Security benefits before normal retirement age, and many as soon as they are eligible at age 62. In many cases, they’d be better off waiting.
You know that SS retirement benefits increase each year you delay receiving them. When benefits begin at age 62, you receive 33% less than you would receive at normal retirement age, which is 66 for people retiring these days. When you wait beyond normal retirement age, the amount you receive increases 8% each year you wait.
You can compute a simple breakeven point for waiting. Suppose at age 66 you’d receive $2,000 monthly or $24,000. Waiting until age 70 increases the benefit to $32,652, or $2,721 per month. That’s $8,652 more annually for the rest of your life. Begin benefits at 66, and you’ll receive a total of $96,000 by age 70. Divide that by $8,652, and you see you’ll have to live more than 11 years after age 70 for waiting to earn the same amount of lifetime benefits.
Inflation and investment returns also are factors to consider. Unfortunately, I don’t know any calculators available on the web that incorporate these factors. But some studies have drawn a few conclusions.
The lower your investment returns, the more sense it makes to delay receiving benefits. These days it’s tough to earn the safe 8% annual return you receive by waiting to begin SS benefits. It’s better to spend some of your investment accounts than accelerate benefits.
Also, the higher you expect inflation to be in the future, the more sense it makes to delay SS benefits.
Another way to verify the value of delaying benefits is to check prices for inflation-indexed annuities. You’ll find delaying SS benefits is much less expensive than buying a commercial annuity with a similar payout.
Delaying benefits is a good move when you expect tax rates to increase. SS benefits are at least partially tax free, so you’ll have more after-tax income.
When you’re married, the effect on your spouse should be considered. After the first spouse passes away, the surviving spouse receives the higher of his or her earned benefit and whatever the deceased spouse was receiving. When you’re the higher earning spouse, you leave your spouse better off by waiting to receive benefits. Think of it as inexpensive life insurance or an annuity. After one spouse is gone, there will be only one SS benefit coming to the household, so you might want to maximize the surviving spouse’s benefit.
There are other factors to consider. Of course when you need the money, you should begin SS benefits even if that doesn’t maximize long-term benefits. Health and longevity also are important factors. Today most married couples should assume at least one spouse will live past 80, and individuals in good health and with good family health histories also should focus on what’s best for an extended life. But those with health problems or reasons not to expect above average longevity should consider taking benefits early.
Beyond these basics, there are some sophisticated strategies married couples should consider. We’ve covered these in detail in the past and summarize them here.
File and suspend. This generally is used when one spouse earns more than the other. When a married person files for retirement benefits, he or she is entitled to the higher of personal earned benefits and half the spouse’s normal retirement benefit. But you can receive benefits based on the spouse’s benefit only when the higher-earning spouse already has filed to receive retirement benefits. The higher-earning spouse might want to wait until a higher benefit is accrued.
A strategy in this case is for the higher-earning spouse to file for benefits when normal retirement age is reached (not before then), and then immediately file to suspend the payments. This allows the lower-earning spouse to collect the higher spousal benefit and also allows the higher-earning spouse to accrue a higher retirement benefit to be paid later.
Collect some now and collect more later. This strategy works for two-earner couples who both have reached normal retirement age. The lower-earning spouse files for regular retirement benefits upon reaching normal retirement age. The higher-earning spouse after reaching normal retirement age files to receive a spousal benefit. It is important for this spouse to file to receive only a spousal benefit, not earned retirement benefits. This pays the higher-earning spouse half of what the lower-earning spouse is receiving.
After reaching age 70, the higher-earning spouse files to receive earned retirement benefits. This maximizes the higher-earning spouse’s benefit and also maximizes the survivor’s benefit for the lower-earning spouse if the higher-earning spouse dies first.
The do-over. This is one strategy that now is extremely limited. Starting Dec. 8, you are allowed a do-over only within 12 months after beginning benefits. Before Social Security published proposed new rules, you could begin retirement benefits before age 70, repay the benefits sometime later, and begin receiving the higher benefits due at the later age. You had to repay the benefits received, but you didn’t have to pay interest or other earnings, just the amount received. This was much cheaper than buying an inflation-indexed annuity.
But under the new rules, you lose the do-over chance once you’ve received benefits for 12 months.
RW January 2011.
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