Decisions, Decisions: When to Take Social Security

What’s your first thought when I say “Social Security?” For many Americans it’s a stomach turning notion that the federal program won’t be there by the time they retire. And that big worry can fuel one the biggest retirement planning mistakes you can make. That is, most American workers — nearly 75% — take their Social Security benefits within two months of retiring, often accepting a reduced benefit rather than allowing their benefit to grow until they reach their Full Retirement Age (FRA) of 66 or 67. If you were born between January 1, 1943, and December 31, 1954, your FRA (when you can collect full Social Security benefits) is 66. If you were born after December 31, 1954, and before January 1, 1960, your FRA increases gradually to 67. The FRA for anyone born on or after January 1, 1960, is 67. However, you can begin collecting a reduced benefit at age 62.

The decision of when to take Social Security is a situation where the early bird does not necessarily catch the worm. Instead, if you collect retirement benefits at age 62, you accept permanently discounted monthly payments. Just how much do you lose? Your benefit grows by approximately 8% a year from age 62 (the earliest age you can begin collecting) until age 70. Risk-free. And that adds up. Waiting to claim your benefit at age 70 instead of age 62 increases your monthly benefit by 76%. Of course, this does not account for withdrawals that you would take from a portfolio if you postponed claiming your benefit until age 70.

Amazingly, less than 3% of those claiming Social Security do so in a way that maximizes their benefit. That is, very few people wait until age 70. We want to get our hands on “our money” as soon as we can. I imagine that many people who decide to collect before their FRA don’t even spend the time to figure out what they are missing by collecting early.

Here’s the breakdown: Your benefit, officially known as the Primary Insurance Amount or PIA, is based on your earnings history. At age 62, you receive 75% of your PIA, versus 100% at your FRA of 66 or 67 and 132% at age 70, when your benefit stops growing.

I think that the “Take the money and run” notion is rooted both in the fear that the program will go belly up and in the mistaken belief that the Social Security benefit isn’t really worth that much. But, your Social Security benefit could be worth more than you think. In households whose head is between 65 and 69 years old, the median expected value of lifetime benefits is $230,000 for singles and $470,000 for couples. And for high income families in the 90th percentile, Social Security’s expected value of lifetime benefits is $390,000 for singles and $710,000 for couples. That’s certainly not pocket change.

Although Social Security has all the rules and red tape of a complicated government program, the basic advice for most people is remarkably simple: Wait to collect your payments for as long as you can afford to do so. That’s because the longer you wait to claim your benefit, the higher your monthly retirement benefit. The only caveat to this advice is if you are in generally poor health, you smoke, or your parents didn’t live long lives, you might consider claiming benefits earlier.

Obviously, if you retire at 62 and don’t take your Social Security benefit until you are 70, you’ll have to draw on other accounts to pay eight years of living expenses. Here, your IRA could be a wise choice. Using IRA assets to support yourself while allowing your Social Security benefit to  grow until you reach age 70 reduces the size of the IRA account, meaning  that your eventual Required Minimum Distributions (RMDs)  at age 70 ½ from your IRA would be lower. And that could have a positive impact on your taxes going forward by helping you to manage your tax bracket.

Finally, if you and your spouse have enough other income to be able to delay claiming Social Security until you both reach age 70, you should explore the “file and suspend” strategy that can boost your expected lifetime benefits by more than 20%. Here’s how it works for Jack and Jill, who are both age 66 and at their FRA:

  • Jill (our higher wage earner) files for Social Security benefits at her FRA of 66.
  • She immediately suspends those benefits until a future date.
  • Her suspension allows Jack to begin claiming a “spousal benefit,” half of the Jill’s suspended benefit. For example, if Jill’s monthly benefit was $2,000, Jack will collect $1,000 a month, or $12,000 a year.
  • While Jack collects the spousal benefit, both Jill’s suspended benefit and Jack’s untapped benefit continue to grow at 8% a year.
  • At age 70, when their benefits stop increasing at 8% a year, Jill re-starts her benefit and receives 132% of her original Primary Insurance Amount (PIA).
  • Jack’s spousal benefit stops, so he files for his own benefit, also 132% of his PIA.

In the four years they used this strategy, Jack and Jill received $48,000 in benefits while their monthly benefits for the future grew by 8% a year. Not bad.

Finally, it’s crucial to realize that your decision of when to begin collecting Social Security is more important than it was for your parents. Many of today’s retirees don’t have pensions and, with longevity increasing, retirement could last for 30 years.

You can estimate your Social Security benefit and find more information to help you decide when to file by using the Social Security Administration’s Benefits Planners on the web. Take your time and consult your financial advisor to evaluate every option.

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