The Social Security Administration has published studies and come up with a surprising statistic — that over 75 percent of those who are on Social Security are NOT maximizing their benefits. One of the major reasons is that 34 percent of those eligible start their benefits as soon as they become 62. Claiming early, or as I refer to it, “in the penalty phase,” could be costing the household anywhere from $50,000 to $250,000 of income over their lifetime.
In The Past
When our parents were considering when to collect their Social Security benefits, there was no question — they would start at their Full Retirement Age of 65 (legislation in 1983 raised the FRA to 66/67, depending on when you were born). They were just happy to be collecting income. Now, however, times have changed, and there are strategies that have been developed to help those who become eligible to maximize their benefits. In addition to the strategies available now, we are living longer than previous generations. So the impact of a wrong decision can be very costly.
The answer to the question used to be, “whenever you need the income.” Now, savvy retirees are taking a more strategic approach to claim Social Security based on mathematical principles. If you consider the total amount of benefits you stand to receive over your lifetime, and if you live even one day past the average life expectancy, you will be better off claiming the maximum benefit at age 70, rather than a reduced benefit at 62.
When interest rates are low, the present value of Social Security’s inflation-adjusted lifetime income stream is higher than when rates are high. In other words, it doesn’t make sense anymore to take those early reduced benefits and invest them. The Social Security formula for delayed benefits is a better deal today.
Increased Life Expectancy
Social Security is also good longevity insurance — just in case you do live to a ripe old age. Baby boomers used to claim at 62 saying, “I could die tomorrow.” Now they are claiming at 70 saying, “I could live to 100.”
If you are married the answer is even more complex. The age at which you claim your Social Security benefit will determine the amount you are receiving at the time of your death. This, in turn, could affect the amount your spouse stands to receive as a survivor benefit if you should die first. It is usually recommended that the higher earning spouse file for Social Security at age 70. This will provide the maximum income to the couple while both are alive and to the surviving spouse after one spouse dies.
As you can see the times have changed and there are many factors that can affect your decision of when to claim your Social Security benefits.
Mark Singer, CFPⓇ, lives in Swampscott and has been in the financial industry for over three decades. If you have any questions contact him at 781.599.2660 or [email protected]. The content was developed in conjunction with Elaine Floyd, CFP®.