Smarter, But Not Smart Enough: When People Claim Social Security
Fewer are taking benefits at 62, which locks in a paltry payout
As a nation, we’re wising up, if slowly. fewer people — about one-third in 2019 — are taking their Social Security Benefits at age 62. But the wisest decision, waiting until age 70 and reaping a 75% bigger payout than at age 62, is made by fewer than 10%.
This data comes from the Center for Retirement Research at Boston College.
A quick course in Social Security’s odd math
The longer you wait, the bigger your payout. On an annual basis, the extra payout can add 6% to 8% a year to your eventual benefit. That’s an unbeatable guaranteed increase. The only other guaranteed returns on your money are cash (yielding less than 1% these days) or a Treasury note. The 10-year Treasury currently pays less than 2% a year.
Every month after you turn 62 that you don’t start Social Security entitles you to a slightly higher benefit when you do eventually claim.
The way those monthly bumps work is tied to what the Social Security Administration refers to as your full retirement age (FRA). That’s the age when Social Security will pay you 100% of your earned benefit. For anyone born in 1960 or later, your FRA is 67.
If your FRA is 67, and you decide to start at age 62, your benefit will be reduced by 30%. That is, you will receive 70% of what you would receive if you instead waited until your 67 FRA to start.
But there’s an even bigger carrot. Between your age 67 FRA and age 70, the program will credit you an additional 8% a year if you keep waiting. So instead of receiving 100% of your earned benefit at 67, you will get 124% of your benefit if you wait to start at age 70.
You can create an account for free at the Social Security website, and you can quickly get a look at your estimated payouts at age 62, your FRA and age 70, based on your actual earnings history on file with the Social Security Administration.
How long will you live? Likely longer than you think.
OK, right about now you’re likely thinking, “If I wait until 70, I might die before I collect a penny, or die long before I collect enough to match what I could have pocketed if I started earlier.”
Yep. You’re right. That could most definitely happen.
But let’s take a deep breath here and talk about the probability of living a very long time. Like into your 90s long.
A 65-year-old man in average health who wasn’t/isn’t a smoker has a 50% chance he will still be very much alive at age 85. For a 65-year-old woman, there’s a 50% chance she will still be alive at 88.
Not dead. Still alive. And that’s just average health. If you land at 65 in above average health, there’s strong odds you could live into your 90s.
Translation: Make it into your 80s and your lifetime Social Security checks (if you start at 70) will surpass what you would receive if you started at age 62 with a lower benefit.
Delaying buys you more insurance.
While it’s human nature to think about that “break-even” point when your total payouts from waiting would exceed your payouts if you started earlier, it’s really missing the value of Social Security.
Social Security is an insurance program. Not an investment deal. Insurance that every worker will have a base level of income to help pay for essentials in retirement.
That it is a guaranteed payout that will never run out, has become ever more important in the past few decades, with the decline in private sector pensions.
That it is a guaranteed payout with an inflation adjustment makes it even more valuable.
By waiting until age 70, you are choosing the biggest possible insurance payout, if you run the (happy) risk of a very long life.
For married couples, this is vitally important. When a spouse dies, the surviving spouse will only be allowed to collect one benefit, not both. That can mean a significant drop in monthly income for the surviving spouse. By having the highest earning spouse wait until age 70, you are setting up the surviving spouse to have the highest possible Social Security payout.
Plan now to be able to be patient
Delaying until age 70 does not necessarily mean you need to keep working, or working full time until age 70. If you have saved up in a 401(k) or IRA or other investment account, academic research says that it is smarter to start tapping those savings before you turn 70, if it helps you wait to start Social Security.
And working part-time, can decrease what you need to pull out of your retirement accounts in your 60s. (For the guys: It might also mean you will live longer.)
It is a bit maddening that such an important retirement security decision is so darn tough to make. Hiring a financial planner to help you sort through all the moving pieces can be money well spent. Many will take on this project on an hourly or project basis.
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