When to take Social Security receives much attention, for good reason. For the majority of Americans, it is the single largest resource for retirees. Adding complexity, evolving laws and strategies such as the file and suspend that have been taken away, leaves people wondering what is left to consider when claiming Social Security.
The first thing you need to know is that you can take normal Social Security benefits anytime between the ages of 62 and 70, with the current Full Retirement Age (FRA) being between 66-67. The intention behind providing options when taking Social Security is that no matter when you start taking it, the total amount would end up being actuarially equal. Meaning that if you live to life expectancy, the benefit will be equal no matter what your age is when you begin receiving benefits. However, to make the benefits equal, you have to make some assumptions. The calculation has to take into account an investment return, inflation, and life expectancy. The ability to claim social security early at age 62 was adopted by congress over 60 years ago, and a lot of these assumptions have changed. People are living longer, interest rates are falling, and, in particular, the longevity for high earners is increasing faster than lower-wage earners. With these changes, retirees would be well served to create a plan and strategy around claiming benefits.
What to consider when claiming Social Security
First, there is no wrong choice. Take Social Security if you need the money and are ready to retire. If you don’t have reasonable assets beyond Social Security and an investment portfolio to withdraw from, you really may not have a choice. Take the benefits and move forward. Currently, 62% of people claim early by age 65, 25% claim at FRA, and only 13% claim after FRA*. We believe if you have other resources, you should consider your options as it is often best to wait as long as possible before taking your benefit.
Each year you wait to receive benefits, past full retirement age, your benefit increases 8% per year, guaranteed. While somebody invested in the stock market with a blend of around 60% stocks and 40% bonds has historically achieved similar returns on average per year, there are no guarantees that will be the case going forward. Further, if you claim as early as possible at 62, your monthly benefit will be 30% less than it would be at your FRA. If you delay as long as possible and claim at 70 your benefit will be 24% more per month compared to your benefit at FRA. Examining the two extremes, delaying until 70 compared to claiming early at 62 can allow you to receive up to 76% more each month! This is a significant increase and it also applies to future Cost of Living adjustments.
Another consideration for delaying Social Security has been the trend of increasing life span. If based on your current health and family history, you project yourself to be one of those living a long life, you should consider delaying your Social Security. Even if you don’t feel you fit in the above category, remember 50% live beyond life expectancy. For a married couple both age 65, there is about a 50% chance one spouse lives to age 90, and an 18% chance one lives to 95. There are some interesting online calculators, such as www.livingto100.com, which attempt to more accurately predict personal longevity.
In terms of financial planning, most people need to be prepared to have retirement income for at least decades. With inflation numbers merely staying where they are, currently in the range of 1.5% – 2.5% year, the costs to maintain your current lifestyle can double during a 30 year retirement. Having a larger lifetime guaranteed income stream from Social Security along with the inflation protection it provides is a great safety net to allow your income to keep pace with rising costs. While investments can grow and beat inflation over time as well, it’s a bumpy and volatile road getting there, with no guarantees.
How do spousal and survivor benefits work?
A married person has the right to claim spousal benefits based on their spouse’s Primary Insurance Amount (PIA). PIA is the payment a person receives at their FRA. If you know your spouse’s benefit is much higher than yours and you are trying to claim spousal benefits, you do so by filing for your own benefit. If your benefit amount is less than 50% of your spouse’s PIA, you will be paid your own benefit first, and then the spousal benefit will be added to that to “top up” your payment so that it equals 50% of your spouses PIA. One thing to note is that you can not get spousal benefits if your spouse has not begun taking Social Security. Another often misunderstood point is that no matter when your spouse claims their SS, your spousal benefit will always be based off the spouse’s PIA. Whether your spouse claims early or delays will not impact the spousal benefit you can get. The only factor that impacts your spousal benefit is if you claim the benefit before your own FRA. If you attempt to claim your and therefore your spousal benefits early, this will reduce the spousal benefit just as it does for your own SS. There is no benefit for someone claiming spousal benefits to delay claiming beyond their own FRA, since your spousal benefit is always based on your spouse’s PIA. So don’t think holding out until 70 is going to change your spousal benefit. To note, there are also spousal benefits available to divorced spouses; these follow their own unique set of rules.
Survivor benefits are the benefits available to a surviving spouse, and your claiming decision can impact the benefits survivors are entitled to. Upon death, a surviving spouse can continue on their own SS or take the benefit of the deceased spouse’s, whichever is higher. In times when looking to maximize the income for a survivor, it can make sense for the higher earner to delay claiming SS in order to provide a greater survivor benefit. Another often overlooked survivor benefit is that children can be eligible for survivor benefits until age 18, and sometimes beyond if they are students or disabled.
Is Social Security going bankrupt?
Many suspect that Social Security is going bankrupt and will not be around to pay its obligations or will at least require reducing benefits in the future. While that is an understandable fear, it is a complicated subject when discussing a federal program. As long as the government has the ability to levy taxes and sell bonds, its programs will not become bankrupt. That does not mean Social Security does not face headwinds and the concerns are unwarranted. Potential adjustments and changes to shore up the program and provide further funding are numerous and often debated.
One solution would require younger people to work longer before they receive their benefits. This has been done before and could very well be attempted again. If people are living much longer and healthier lives, legislators could reason that they need to work longer to receive benefits. Payroll taxes may be increased to provide increased funding for Social Security. The government could raise or eliminate the cap on wages subject to payroll tax. The government could apply more “means testing” to benefits similar to how Medicare Part B costs increase based on income. Another option is within the Social Security trust funds. These trust funds hold the funds not needed in the current year to pay benefits and administrative costs. By law, they are required to only invest in Treasury bonds guaranteed by the U.S. Government. Perhaps one day the trust will be allowed to invest in other assets, such as equities.
For your financial plan, consider the choices you have control over. Create a strategy that balances your current cash flow needs with the protection that a larger Social Security benefit could provide. Longevity is often talked about like it is a risk, but in reality, longevity is often a goal. Most people hope for a long, healthy life! Let’s create your financial plan and make decisions with that goal in mind.
*Sources: Urban Institute, Social security Administration, 2018 data.