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Staking Your Claim

Richard Quinn

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.

The goal of Social Security is to provide a safety net, but not full salary replacement and certainly not sufficient income to maintain your preretirement lifestyle. In Franklin Roosevelt’s words from 1935, Social Security offers “some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”

Unfortunately, Social Security has become more than just a “measure of protection.” For far too many older Americans, it’s their major source of income. Among elderly Social Security beneficiaries, 48% of married couples and 69% of single individuals receive 50% or more of their income from Social Security. Meanwhile, 21% of married couples and 44% of single individuals rely on Social Security for 90% or more of their income.

Social Security is so complicated that no average person can navigate the benefit claiming choices. In fact, I suspect most people are unaware of their choices or even the questions to ask. Claiming strategies are most complicated when a spouse is involved. Should you both start at the same time? Should one delay until a later age? Can delaying the main breadwinner’s benefit increase a spouse’s benefit?

Several years ago, Boston College’s Center for Retirement Research published an interesting paper entitled, “Should You Buy an Annuity From Social Security?” Its analysis looked at using your savings to supplement income until age 70, thereby allowing your Social Security benefit to grow, with the cost of this “annuity” being the savings you depleted. This makes sense and the strategy may work for those with a healthy amount of savings. But given the data on retirees’ reliance on Social Security and the sorry state of America’s retirement savings, is it practical?

Arguably, we look at delaying Social Security benefits the wrong way. It’s not that we add benefits by waiting. Rather, it’s that we lose less. In other words, we should think of the full retirement age as 70. If you claim earlier, how large a cut are you willing to suffer?

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.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include What Do You MeanOpen Season and Straight Talk. Follow Dick on Twitter @QuinnsComments.

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Langston Holland
Langston Holland
2 years ago

“Arguably, we look at delaying Social Security benefits the wrong way. It’s not that we add benefits by waiting. Rather, it’s that we lose less. In other words, we should think of the full retirement age as 70.”

This nails it. I’m stealing it. It concisely marries fact and motivation. It’s a close sister of another plundered quote: “Don’t save what is left after spending, but spend what is left after saving.” (Warren somebody)

Money quotes from your analysis link:

Those already receiving SS:
“Current retirees will collectively lose an estimated $2.1 trillion in wealth because they made the sub-optimal decision about when to claim Social Security, or an average of $68,000 per household.”

Future retirees assuming no change in behavior:
“Retirees will collectively lose $3.4 trillion in potential income that they could spend during their retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household.”

Mable, Mable, wait if you’re able:
“Only 4 percent of retirees make the financially optimal decision about when to claim Social Security. About 57 percent of retirees would build more wealth through their life if they waited to claim until they were 70 years old (when only 4 percent of retirees currently claim), while only 6.5 percent of retirees would have more wealth if they claimed prior to turning 64 (when over 70 percent of retirees currently claim benefits).”

“Elderly poverty could be cut by nearly 50 percent if all retirees claimed Social Security at the financially optimal time.”

Langston Holland
Langston Holland
2 years ago

“Arguably, we look at delaying Social Security benefits the wrong way. It’s not that we add benefits by waiting. Rather, it’s that we lose less. In other words, we should think of the full retirement age as 70.”

This nails it. I’m stealing it. It concisely marries fact and motivation. It’s a close sister of another plundered quote: “Don’t save what is left after spending, but spend what is left after saving.” (Warren somebody)

Money quotes from your analysis link:

Those already receiving SS:
“Current retirees will collectively lose an estimated $2.1 trillion in wealth because they made the sub-optimal decision about when to claim Social Security, or an average of $68,000 per household.”

Future retirees assuming no change in behavior:
“Retirees will collectively lose $3.4 trillion in potential income that they could spend during their retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household.”

Mable, Mable, wait if you’re able:
“Only 4 percent of retirees make the financially optimal decision about when to claim Social Security. About 57 percent of retirees would build more wealth through their life if they waited to claim until they were 70 years old (when only 4 percent of retirees currently claim), while only 6.5 percent of retirees would have more wealth if they claimed prior to turning 64 (when over 70 percent of retirees currently claim benefits).”

“Elderly poverty could be cut by nearly 50 percent if all retirees claimed Social Security at the financially optimal time.”

Jim Wasserman
Jim Wasserman
2 years ago

Good piece. I know there are many who earn less or because of health or other factors can’t wait till 70 and need the supplement earlier, but I have also met early retirees who earned nice salaries but made their plan to get just enough to get to 62 and then go on SS. Short-sighted as they short themselves.

J Cp
J Cp
2 years ago

SS has no funds. It has US Treasuries that, when redeemed by The SSA, must be paid by the US Treasury from current tax revenue. It is well recognized that current SS benefits are paid from current tax revenue. This despite the “trust fund” which is simply a political shell game. As the SS burden goes it is inevitable that taxes will increase.

In a grand aggregate total, retirement promises coming due at all levels of government and including union funded pensions, far exceeds the amount of revenue that can be raised (think Laffer curve).

I believe we will see the erosion of SS benefits via means testing and ever higher premiums for Medicare. That along with an targeted tax on holders of “excessive” retirement funds.

Longer term a new federal system that pools (euphemistically speaking) all retirement wealth as a means to secure benefits for all seems quite plausible.

parkslope
parkslope
2 years ago
Reply to  J Cp

“Social Security is largely a “pay as you go” program, meaning today’s benefits are funded primarily by the payroll taxes collected from today’s workers. For over three decades, however, Social Security collected more in payroll taxes and other income than it paid in benefits and other expenses, and the Treasury invested the surplus in interest-bearing Treasury securities, ultimately reaching a total of nearly $2.9 trillion in trust fund reserves. In 2020, Social Security will begin redeeming those reserves to help pay benefits. Payroll taxes from current workers will continue to pay for the bulk of benefits. The trust fund reserves will make up the difference between income and costs until the reserves are depleted. At that point, Social Security’s income will still be able to pay 80 percent of promised benefits — even in the unlikely event that policymakers fail to act.”
https://www.cbpp.org/research/social-security/policy-basics-understanding-the-social-security-trust-funds

Langston Holland
Langston Holland
2 years ago

“Arguably, we look at delaying Social Security benefits the wrong way. It’s not that we add benefits by waiting. Rather, it’s that we lose less. In other words, we should think of the full retirement age as 70.”

This nails it. I’m stealing it. It concisely marries fact and motivation. It’s a close sister of another plundered quote: “Don’t save what is left after spending, but spend what is left after saving.” (Warren somebody)

Money quotes from your analysis link:

Those already receiving SS:
“Current retirees will collectively lose an estimated $2.1 trillion in wealth because they made the sub-optimal decision about when to claim Social Security, or an average of $68,000 per household.”

Future retirees assuming no change in behavior:
“Retirees will collectively lose $3.4 trillion in potential income that they could spend during their retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household.”

Mable, Mable, wait if you’re able:
“Only 4 percent of retirees make the financially optimal decision about when to claim Social Security. About 57 percent of retirees would build more wealth through their life if they waited to claim until they were 70 years old (when only 4 percent of retirees currently claim), while only 6.5 percent of retirees would have more wealth if they claimed prior to turning 64 (when over 70 percent of retirees currently claim benefits).”

“Elderly poverty could be cut by nearly 50 percent if all retirees claimed Social Security at the financially optimal time.”

parkslope
parkslope
1 year ago

I can’t help but wonder what optimal claiming of SS benefits would do to its funding.

Rick Connor
Rick Connor
2 years ago

Excellent article. I love the idea of viewing 70 as FRA. I read the BC CRR report when it first came out and it has influenced my thinking ever since. I have shared it with many friends and family since. Point # 4 is (survivor’s benefit) is one a lot of my male friends forget.

Jiab Wasserman
Jiab Wasserman
2 years ago

Good article. I like your suggestion to think of FRA as 70. With longer life expectancy, delay SS until 70 provides longevity protection. I also think of a 8-year loss from not claiming at 62 as a premium for deferred income annuity with inflation protection beginning at 70.

CJ
CJ
2 years ago

While SS itself will still have funds to pay, albeit at reduced rates, even if Congress ignores the looming shortage, I have a different worry. It may or may not be valid, but as a longtime saver who’s sacrificed a lot of short term wants to save for retirement, I’m concerned that means testing will be the “solution” used to divert what’s left of SS to cover those at lower income/savings levels.

I don’t mind paying more in taxes for social programs that help those who truly need it…but really hope they don’t unfairly reduce or eliminate SS based upon one’s current assets. Especially after I paid double SS taxes (self-employed) for half my career. With no pension and just my invested savings to rely on, SS is an important source of stability to me.

Sometimes this tempts me to claim early, but my plan is still to wait till 70. I just hope I don’t regret that.

Mik Barbasol
Mik Barbasol
1 year ago
Reply to  CJ

I agree that eventually SS means testing will be required to support those who CHOSE not to be productive…it’s a failed political ideology disguised as fairness.

Roboticus Aquarius
Roboticus Aquarius
1 year ago

It’s an interesting choice, not just because of the benefit formulas, the spousal strategies, and the annual growth in payout, but because it’s also impacted by your investment skill and luck. If you are a lousy investor, wait until 70 if at all possible. If you make 10% per year every year with your investments, no matter what (unlikely as that is), then take it at 62. The cutoff appears to be, logically, 7-8%, which is an achievable number. My personal analysis suggests that I could pick any SS retirement age from 62-70 and the results would not vary by much in the long run (I used annual cash flow analysis to make that determination.)

I also modelled the SS payout algorithm, so I have a pretty good idea of the value of working ‘one more year’. For me it’s already getting pretty minimal. For my wife, she stayed home with the kids for a while, so her work years are still “filling zeroes” in the calculation, and thus are pretty valuable.

WillYalsu
WillYalsu
1 year ago

With all the obese people in this country, life expectancy probably won’t improve much in the coming decades. So Social Security may be able to survive as well as planned. Unfortunately for current workers, the obesity epidemic is likely to trigger a spike in diabetics that will consume huge Medicare funds with all the co-morbid conditions of diabetes. So Medicare withholds and rates may go up.
Our culture of 800 calorie ‘biscuits’ and 1800 calorie ‘personal pizzas’ is toxic. Go to Italy (land of pizza and pasta) and there are hardly any overweight people, let alone obese ones.

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