It's so tempting. You turn 62, and Uncle Sam is willing to start handing over Social Security benefits -- every month for the rest of your life. Before you take the money and run, consider the potential pleasures of deferred gratification. Whether you're single or married, waiting to claim your benefits -- even by a year or two -- is likely to pay off in higher benefits over your lifetime.
As income guarantees of private pensions disappear, one of the costliest mistakes a retiree can make is underestimating the value of Social Security, says James Mahaney, vice-president of strategic initiatives at Prudential Financial. There is no other type of retirement income stream that protects against market downturns, interest rate declines, inflation and longevity risk -- while also providing benefits for a spouse and survivor, Mahaney says. "The bigger Social Security can become as part of your portfolio, the better off you will be," he says.
Until recently, the conventional wisdom was that total lifetime benefits for someone with average life expectancy would be the same whether the beneficiary took a smaller benefit at 62 or a larger benefit at 70. But a growing body of research shows that, even when one's life span is shorter than average, it may pay to delay for at least a couple of years past the early retirement age of 62.
For most married couples, for instance, delaying benefits until 70 for at least the higher earner is a no-brainer. By coordinating the dates they each claim benefits to take maximum advantage of spousal and survivor benefits, a husband and wife can boost lifetime benefits by hundreds of thousands of dollars.
Many singles can benefit from waiting, too, according to research by economist Sita Nataraj Slavov of the American Enterprise Institute, a think tank. Today's historically low interest rates play an important role.
Think of it this way. If you take Social Security at 62, you'll be able to limit tapping your IRA or other savings. That could make financial sense if the dollar in your nest egg today will be worth more next year.
But with U.S. Treasuries earning an after-inflation rate of 0%, collecting Social Security benefits early becomes a bad deal, says Slavov and co-author John Shoven, an economics professor at Stanford University. Social Security benefits grow an average of about 7% a year between 62 and 70, not including cost-of-living adjustments. That means you're earning a bigger return by delaying Social Security benefits than you are on your safe investments. And the inflation-adjusted "annuity" you're getting from Social Security is considerably better than any annuity you can buy on the commercial market during this low-interest-rate environment. "With today's interest rates, some degree of delay is advantageous even for people" with lower-than-average life expectancies, Slavov says.
The fundamentals. Before you can make your own calculations, you need to understand the basics. If you were born between 1943 and 1954, you can collect your "primary insurance amount" at age 66. The full retirement age gradually rises to 67 for those born between 1955 and 1960, but for this story we'll assume 66 is the full retirement age.
You can start claiming at 62, but your benefit will be permanently reduced by a fraction of a percent for each month you claim before your full retirement age. Claim at 62, and your benefits will be cut 25% compared with what you would receive if you claim at 66.
You get a delayed retirement credit of 8% for each year you wait to claim past your full retirement age until 70. Say you're due $2,000 at your full retirement age of 66. If you claim at 62, you will get $1,500. Wait until 70, and your benefit jumps to $2,640 -- 76% more than the take-it-early benefit. (And that doesn't include the cost-of-living increases that add to the benefit while you wait.)
If you're married and your primary insurance amount is less than your spouse's, you can claim either a benefit on your own record or a "spousal" benefit. If the lower earner first claims at full retirement age, the spousal benefit is 50% of the other spouse's primary insurance amount. The lower earner can't claim a spousal benefit until the other spouse files for his benefit.
Actually, a spousal benefit is two benefits: the lower earner's own benefit plus a supplement so that the total received equals up to one-half of the higher earner's benefit. Here's an illustration from Mahaney: Ken and Mary are the same age. Ken is eligible for a full benefit of $2,000, while Mary qualifies for her own $600 benefit. After subtracting Mary's full benefit from one-half of Ken's $2,000 benefit, she's eligible for a $400 spousal benefit. If they both file at 66, she gets her $600 plus the $400 spousal amount.
The size of Mary's total benefit will be reduced if she files for her own benefit earlier. Say Ken waits until 66 to file for his full $2,000 benefit. In the meantime, at 62, Mary files for her own benefit, which is reduced by 25% -- to $450. When Ken files, Mary will get her $400 spousal benefit -- for a total of $850 a month.
If you're single. The cost-benefit analysis for singles is fairly straightforward. Delaying makes financial sense if you live long enough so that the extra amount you receive via fatter benefits more than makes up for the benefits forfeited during the waiting years.
Even if you live to average life expectancy, today's low interest rates change the equation for singles who delay, according to Slavov and Shoven. For a single woman with average life expectancy and a full retirement benefit of $1,500, the present value of her lifetime benefits would be $318,321 if she claims at 62, assuming a 0% interest rate. (Present value is the current value of a future sum.) That compares with $376,990 if she delayed until 70 -- for an 18% boost.
Why the difference? The authors say that when interest rates are close to 0% -- or even up to 2.9% -- the value of the future Social Security benefits is considerably higher than what you can receive if you placed the money in safe investments or an immediate annuity.
If you're married. Married couples can maximize their joint lifetime income by coordinating their start dates. A top goal for couples is to boost the benefit for the surviving spouse, who will get 100% of the higher earner's benefit when he dies if she takes the survivor benefit at or beyond her full retirement age. The benefit will include any of the higher earner's delayed retirement credits and cost-of-living adjustments. The widow or widower can claim a survivor benefit as early as age 60, but the benefit will be reduced if the survivor collects before full retirement age. For instance, by claiming at 60, the survivor will get 71.5% of the primary earner's benefit plus any delayed credits.
Wives tend to gain the most from strategies to boost the survivor benefit because they generally earn less than their husbands and live longer. Once her husband dies, the wife can step up, from either her own lower benefit or from a higher spousal benefit, to the even higher survivor benefit.
One of the most important rules of thumb for most married couples: If just one spouse is expected to live well beyond age 80, the couple's cumulative lifetime benefits will usually be highest if the higher earner delays claiming his benefits until 70, according to research by William Meyer and William Reichenstein, principals of consulting firm Social Security Solutions. (Kiplinger's has partnered with Social Security Solutions. For more information on obtaining a customized report for optimizing your own benefits, go to kiplinger.socialsecuritysolutions.com.)
Consider this example from Meyer and Reichenstein: Assume Alice and Sam are both 62. His primary insurance amount is $2,000, and his life expectancy is 80. Alice's full benefit is $700 and she is expected to live until she's 90. If they both claim at 62, they'll each get reduced benefits -- $1,500 for him, $525 for her -- until Sam dies at age 80. At that point, Alice steps up to a monthly survivor benefit for ten years. Total lifetime benefits: $635,400.
But say Sam delays until 70 while Alice still claims her benefit early -- at $525 a month. When Sam eventually claims, he'll get $2,640 a month, with his delayed retirement credits, until he dies. Alice will then step up to a $2,640 survivor benefit for the last ten years of her life. Total lifetime benefits: $747,000.
And, says Meyer, delaying by the higher earner makes even more sense if there's a big age difference between the two spouses. "The younger spouse may have a higher survivor benefit for a longer time if the older, higher-earning spouse dies early," Meyer says.
Smart strategies for married couples. Using the basics, you can engage in some little-known strategies. Sometimes these flummox Social Security personnel -- but they're all legal.
Say you are the higher earner and want to delay until 70. If your wife is 62 or older, she could collect her own benefit -- but perhaps she'd get more money with a spousal benefit. One catch: She can't collect a spousal benefit until you file for your own.
As long as you're full retirement age, you file for your benefit and your wife applies for a spousal benefit. You ask Social Security to suspend your benefits. Your wife will still receive a spousal benefit, and you can continue to accrue delayed retirement credits until you reapply for benefits, presumably at age 70. Because you're increasing the value of the survivor benefit, this "file and suspend" maneuver supercharges the survivor benefit for your wife if you die first.
To show the advantages of this strategy, here's an illustration by Henry Hebeler, author of Getting Started in a Financially Secure Retirement (Wiley, $20). (You can plug your own numbers into his free "Strategic Social Security Planner" at www.analyzenow.com.)
Let's take the previous Sam and Alice example, and plug the data into Hebeler's software. If the couple uses the file-and-suspend strategy, Sam files for and suspends his benefit at 66 and Alice takes a spousal benefit. At 70, Sam reapplies for his delayed benefit -- worth $2,640. That's what Alice will get when Sam dies, considerably more than if they both claimed at 62. Total lifetime benefits: $961,000.
To be fair, assume that couple will need to dip into savings to make up for the missing Social Security benefits -- to the tune of $193,000, according to Hebeler's online tool. "They have to make sure they have saved enough money to live on until they get their benefits," Hebeler says. Even after subtracting these costs, the couple will collect at least $120,000 more in lifetime benefits than if they both filed at age 62.
Here's another valuable strategy. In most cases, it's the lower-earning spouse who collects a spousal benefit. But if you're the higher earner, you can bring in some extra money by applying for a spousal benefit at your full retirement age -- and still allow your own benefit to grow until age 70. Once you turn 70, you can switch to your own benefit and your spouse can claim a spousal benefit, of up to 50% of your primary insurance amount. However, her survivor benefit will equal up to 100% of your delayed benefit if you die first.
Do you both want to delay until 70 while bringing in some income? Try the combo strategy: One spouse employs the file-and-suspend strategy, while the other files a restricted application. This way, one spouse can get a spousal benefit for several years, while both earn delayed retirement credits. Both spouses must be full retirement age to employ this strategy.
Consider this illustration from Meyer and Reichenstein. Bernard is 66, a few months older than Linda. His full benefit is $2,000, and hers is $1,200. They both would like to delay collecting their own benefits until 70, but they also want to bring in extra income.
Bernard files for and suspends his benefit at 66. This enables Linda, at 66, to restrict her application to a spousal benefit, which is $1,000 a month. (She could have filed for her own $1,200 benefit, but waiting until 70 will boost the couple's lifetime income.) At 70, her own benefit, with its delayed credits, will have grown to $1,584 a month. Meanwhile, Bernard's benefit will have grown to $2,640, which Linda will receive when her husband dies. If he dies at 85 and she lives until 90, their total lifetime benefits will be $974,112. If, instead, they both file at 62, their total benefits will be $767,223 and Linda's survivor benefit will be lower.
The do-over strategy. What if you claimed before your full retirement age, and now think you erred by consigning yourself to a lifetime of reduced benefits? You might have a shot at a do-over.
Retirees who are already collecting benefits can reset the clock by voluntarily suspending benefits and reapplying at age 70. You need to be full retirement age to suspend your benefits. This allows you to earn up to four years in delayed retirement credits.
Say you were eligible for $2,000 in benefits at age 66, but you took a 25% cut by claiming at 62. At 66, you suspend your benefits and reapply at 70. Your benefit at 70 would be $1,980, or 132% of your $1,500 benefit -- not including cost-of-living adjustments.
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