Most seniors claim their Social Security retirement benefit too soon.
As they enter their 60s workers usually understand that they can claim their Social Security retirement benefit at any time between age 62 and 70. But they don't understand the full implications of this crucial decision.
Most of them decide to claim their benefit sooner rather than later. In my opinion, this is more often than not a mistake.
Full retirement age (FRA) is 66 for people born between 1943 and 1954. If you claim before your FRA, you receive reduced benefits. The longer you wait, the more you increase the monthly benefit you will receive based on your work record. This reduction (or increase) in benefits is permanent: it will continue for the remainder of your life. Even if you live to be 100 years old or more.
Your decision to claim early may reduce your spouse's benefits as well. If you are married and are the higher earner spouse, waiting to take Social Security retirement will usually provide a higher survivor benefit for your spouse if he or she outlives you. The earlier you claim, the more the survivor’s benefit will be reduced.
Unfortunately, claiming early is the popular choice. Most workers start taking their benefits before they reach their FRA. According to the Social Security Administration Annual Statistical Supplement for 2012, 74% of retired workers elect to claim their benefits early. This means they will receive reduced benefits for the remainder of their lives and diminish the survivor benefit available to their spouse.
Perhaps because they have lower income from other sources, relatively more women (76.4 percent) than men (71.3 percent) elect to claim reduced benefits.
Experts Agree that Claiming Early is Usually a Mistake
According to the The Center for Retirement Research at Boston University “[i]f you’re approaching retirement, when you claim benefits is the most important financial decision you’ll likely make.”
Most experts believe that claiming early can be a huge mistake that can cost retirees a lot of money over the rest of their lives. People don’t adequately consider the long term consequences of their action. People don’t understand how risky it is to claim early.
Social Security retirement is a unique benefit that can be a particularly valuable resource as you age and your other assets and sources of income dissipate. Unlike most other resources, Social Security increases each year to offset the effects of inflation. It is not subject to the whims of the stock market. And it is government guaranteed.
And unlike your other resources, Social Security is a benefit that you cannot outlive. The reality is that people are living longer. If you and your spouse are both age 65 today, the probability is that at least one of you will live to age 90. Few people have saved enough to protect themselves from this “longevity” risk.
Longevity risk may be your biggest potential source of financial insecurity in retirement. You don’t want to enter your late 80s with your savings dried up and your sources of income reduced. But you can protect yourself from longevity risk by maximizing your Social Security – a source of income that grows each year to keep pace with the growth in the cost of living.
But Isn’t Social Security Going Broke?
Don’t be brainwashed into thinking that Social Security won’t be there for you in the future. That seems very unlikely. Politicians want to get re-elected. And they know that seniors who have a vested interest in protecting Social Security are more likely to vote than any other age group. (See: Why Older Citizens are More Likely to Vote: Retirees have valuable government benefits to protect).
This means that while making even minor changes to Social Security is politically difficult, politicians are not going to let it go broke. It is much more likely that Social Security will get the tweeks it needs to stay strong for the next 50 years. Even if there are changes, any significant reduction in benefits will almost certainly be applied only to younger workers.
The bottom line: if you are in your 60s today, you can count on Social Security. It should be there for the rest of your life. And it won’t run out like your savings might if you live too long. Social Security should remain as your most reliable source of retirement income, even as you and/or your spouse live well beyond age 90.
The Math: Benefit Reductions and Increases
Here is the math on how early vs. delayed claiming affects your Social Security retirement benefit.
Reduced retirement benefits can be claimed as early as age 62. For workers who reach age 62 in 2005 through 2016, the maximum reduction is 25 percent. For example, if your FRA benefit is $1,000 a month, you can claim and receive a benefit of $750 a month at age 62.
Increased retirement benefits are received by insured workers who postpone their retirement beyond FRA. Their benefits are increased for each month of nonpayment beyond their FRA up to age 70. This increase is called a “delayed retirement credit.”
The total credit possible per year for delayed retirement credits is 8 percent for workers who reach age 62 in 2005 or later. This means that insured workers who wait until age 70 to start receiving benefits will receive a 32% increase in their monthly benefit for the rest of their lives. For example, if your FRA benefit is $1,000 a month, you can wait to claim and receive a benefit of $1,320 per month at age 70.
In other words, by waiting until age 70 to claim, you will increase your monthly benefit by 76% over what you receive if you claim at age 62.
The amount you receive when you first get benefits sets the base for the amount you will receive for the rest of your life. Your retirement payments will change each year based on cost of living adjustments. But these proportionate reductions or increases are permanently locked in.
To estimate your particular benefit amounts go to http://socialsecurity.gov/estimator/.
Issues to Consider Before you Decide
When to claim Social Security is surely one of the most important decisions we face at retirement. Delaying your claim is the smart choice for many people but not for everyone. The best choice for you will depend on your personal circumstance including your current cash needs, your health situation, your family longevity, and your future financial needs.
A Social Security Administration (SSA) booklet notes that there are many issues to consider as you make your decision, such as:
- Are you still working?
- Do you come from a long-lived family?
- How is your health?
- Will you still have health insurance?
- Are you eligible for benefits on someone else's record?
- Do you have other income to support you if you decide to delay taking your benefits?
- Will other family members qualify for benefits with you on your record?
Too Important to Take Lightly
When to claim Social Security is a critically important decision that most seniors are making without adequate information and consideration of the long term consequences. But it is vital to your future financial security and standard of living.
According to A. Barry Rand CEO of AARP “the typical older American has an income of about $22,000 a year, and Social Security accounts for about half of a typical older family’s income.” And even if you are a higher middle income couple, Social Security is likely to make up 20% or more of your retirement income.
Claiming your benefit should not be a casual decision. Spend some time considering the implications for you and your spouse.
Social Security is complicated with many tricks and traps. Strategies have been developed to help you maximize your benefits. And computer programs have been developed that can help you understand the financial implications of your decisions.
You can research these on your own. Or you may want to seek some expert guidance from a financial planner, accountant or lawyer who is knowledgeable about Social Security before you make any decisions. It’s worth the investment of your time and a few dollars. Maximizing benefits can make a difference of $100,000 or more in income over the lifetimes of a dual income married couple.
Before you file to claim your retirement benefit I suggest you read the SSA booklet “When To Start Receiving Retirement Benefits.”Also see SSA, What Is The Best Age To Start Your Benefits?
And take 3 minutes to watch the video: Social Security: It Pays to Wait
To estimate your particular benefit amounts go to http://socialsecurity.gov/estimator/.
Delay is not right for everyone. If you really need the income or don't expect to live beyond age 80, you might be better off claiming early. For an article discussing reasons you might want to claim early see: When It Makes Sense To Take Social Security Income At 62
I have used a planning strategy called "file and suspend" myself to maximize my family's benefits. Here is a link to my blog article about it. http://marshallelder.blogspot.com/2013/03/file-and-suspend-to-help-maximize.html.
A number of articles and books have been written to help consumers make smart decisions and maximize their Social Security Benefits. Here are some examples:
- The Social Security Claiming Guide put out by the Center for Retirement Research at Boston College. The Social Security Claiming Guide is available online at http://fsp.bc.edu/social-security-claiming-guide/
- “How to Maximize your Social Security Benefits” http://www.aarp.org/content/dam/aarp/money/budgeting_savings/2012-02/How-to-Maximize-Your-Social-Security-Benefits-AARP.pdf
- It’s Your Money: Simple Strategies to Maximize your Social Security Income, by John and Angela Deppe.
- Social Security Strategies: How to Optimize Retirement Benefits, by William Reichenstein and William Meyer.
- Executive Summary “Understanding Unusual Social Security Claiming Strategies” from the Journal of Financial Planning: http://www.fpanet.org/journal/ClaimingStrategies/
- The Danger of Trusting Social Security's Online Advice http://www.pbs.org/newshour/businessdesk/2013/09/the-danger-of-trusting-social.html