I’ve written here (“Is 70 The New Retirement Age?”) about the value of deferring your Social Security benefit—as the result of working beyond your early retirement age (62) or your full retirement age (FRA), which is now 66 for those reaching that milestone today.
I recently heard Bill Meyer of Social Security Solutions Inc. speak about claiming strategies. Bill is passionate about the topic, the way some people are passionate about football—I know this is hard to believe since we’re talking about Social Security, but he is. If you really want to understand how something works, find somebody who is passionate about it to explain it to you. At the very least, check out the claiming strategy guidance provided on his website.
I’ve also added the Social Security Claiming Guide from Boston College’s Center of Retirement Research to this site’s Resources section. Spending a few minutes with this guide or using SocialSecuritySolutions.com may have a dramatic impact on the amount of secure, steady income you have during retirement. Possibly tens or even hundreds of thousands of dollars difference. Well worth your time and money. Hopefully that will spark you to think more strategically about this critical retirement decision.
Social Security might seem a boring, and, these days, a politically loaded subject. But it’s a vital part of your retirement planning. Consider:
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- SS provides an inflation-adjusted lifetime annuity with 100% survivor benefits, based on the payroll taxes you have paid throughout your working career
- In short, it’s the default income floor for your retirement years, especially if you do not have a pension
- If you are an average or higher than average earner, SS will not provide nearly enough secure income flooring to support your pre-retirement standard of living
- The higher your standard of living, the more secure, low-risk income flooring you need
- Your SS benefit will increase by 75% if you defer claiming early at age 62 until age 70, the last year that delaying increases your benefit amount, significantly increasing your secure income floor
Since you will likely need more secure income flooring to support your retirement lifestyle, maximizing your SS benefit may be cheaper than buying other kinds of secure retirement income. We’ll explore that below and in more detail in part two of this post.
About 37% of those age 62 claim SS early (1), sacrificing 25% of their full retirement benefit available at age 66. The long-term trend has declined since 1995, when over 50% claimed at age 62. The trend reversed up in 2008-2009 to 42% during the recession when retirement portfolios were smacked down, but has again dropped down to pre-recession levels.
More people are working longer into their 60’s now. According to this broad survey (2), about 60% of retirees claim when they stop working, 10% claim while still working, and about 30% will defer claiming until after they stop working. The survey indicates that the median retirement and claiming age are both 65 (so the statistically meaningful range for claiming is 62-68).
Medicare eligibility begins at age 65, so for many who have health insurance through an employer, age 65 becomes the earliest practical date they can stop working without having to pay for costly personal health insurance coverage. (Because your Medicare Part B (major medical) premiums are higher if you enroll after 65-1/2, everyone should file for Medicare at 65, even if you defer coverage because of continuing health insurance from an employer; many policies co-ordinate coverage with Medicare after age 65, so your mileage may vary).
Further, the SSA withholds $1 of SS benefits for every $2 of any earnings from employment above $14,640/annually until FRA (66), and benefits are taxable on a progressive scale above that annual earnings threshold as well, at any age once you have claimed. For many, this has a chilling effect on claiming SS benefits while still employed.
So, a bit more than a third (37%) claim SS early at 62, a bit less than a third (30%) defer claiming even after they stop working though they mostly claim by 69, and almost 60% quit working and claim at the same time, at a median age of about 65, when everybody files for Medicare (even if deferring coverage). Which means that over half do not defer claiming SS to increase their benefit beyond FRA—leaving 8% a year until age 70, another 32% possible increase, on the table.
That shouldn’t be too surprising. For many, they need to start collecting when they stop working. According to the SSA(3), SS is more than half of retirement income for two-thirds of the program’s 36 million beneficiaries. It’s more than 90% of income for 35% of beneficiaries—15 million retirees. After SS benefits, the next biggest chunk of income after age 65—29%—comes from employment. Only 11% of retirement income, on average, comes from personal savings and assets.
The lifetime break-even point for delaying SS benefits varies somewhat for each individual or couple. In general, if you only live to about age 80, claiming at age 62, 66, or 70 results in about the same cumulative benefits.
The benefit of deferring begins to mount up the longer you or your spouse live, to age 85, 90, 95, or beyond. For a single individual with a FRA benefit of $2,000/month and living to age 90, deferring benefits until age 70 results in $130,000 more lifetime payout . For a couple, with one spouse dying at age 80, the other at 94, the difference is almost $260,000 (4).
One way to think of this puzzle is as a form of insurance, and not as a paycheck—longevity insurance. And cheap longevity insurance, at that, as we’ll explore in part two. You may not need it or get the full benefit of it, but if you do need it, and don’t have it, your quality of life can take a huge hit.
Low-frequency high-impact risks are best managed by pooling the risk with insurance. Outliving your money is one such risk, though you can self-insure if you have enough savings. Note that the SS program is officially known as Old-Age, Survivors, and Disability Insurance (OASDI).
With this in mind, most financial planners suggest you defer until age 70 and use other savings to replace the forgone SS benefit, if you are in reasonable health. Even those with serious health issues are living longer, many longer than the actuarial average used to calculate the sliding SS benefit scale, which is ‘neutral’ for average life expectancy.
Along with deferring, the higher earner in a household should consider filing and suspending at FRA, allowing the lower earner to collect half the higher earner’s benefit from his or her age 66 to 70, when both start collecting their maximum benefit. This offsets some of the deferred benefits, without affecting the credit for delaying.
If you are a two-income household, or a high-earner, or have a pension, a sizeable amount of savings, an inheritance, or a successful business, don’t speed dial through your Social Security filing decision. Your claiming strategy can make a meaningful difference in your family’s retirement lifestyle.
If your resources are limited, your SS benefit may be even more important to your income floor than if you have significant assets. Your SS options are more limited, however—mostly, you can work longer, deferring SS and increasing your benefit while saving more and reducing expenses while still working. Coordinating benefits in a working household can still be meaningful, especially the file and suspend strategy for the higher earner, allowing the lower earner to begin collecting while also deferring and still working.
Social Security is a key part of retirement income planning. Make it part of an overall household retirement income plan, not an isolated decision you and your spouse make separately.
In the next post in this series, “Comparing the Costs of Buying Retirement Income,” we’ll look at an example so you can see the cost and value of deferring and how it impacts your retirement income.