Waiting to File for Social Security Benefits Is Hard, but Payoff Is Sweet

Imagine if, when you were a kid, your mom baked your favorite pie and made you an offer:

She could slice a piece for you right then, pop it on your plate and let you eat it. But if you waited until after dinner, your slice would be bigger. And if you could hold off until bedtime, the piece would be even bigger. Not just that day, but for the rest of your life. Every time you had pie for dessert, the size of your slice would be based on the decision you made that day.

I guess we would all like to think we’d have the discipline to wait for the biggest slice possible. Because who doesn’t want more pie?

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But what if you’d helped your mom bake that pie, and felt you had earned your slice and had been waiting long enough? Or what if you were legitimately hungry and thought you might need the pie to survive? And what if you had to watch others eat their pie while you waited, worried there wouldn’t be any left by the time you got your slice?

I’m sure you can see where I’m going. The justifications for taking that smaller piece of pie are many. I know, because I hear similar reasons all the time from soon-to-be retirees who want to claim their Social Security benefits at 62 or 63, or their full retirement age (for most, that’s between 66 and 67). It’s just so tempting — even if they know delaying until they’re 70 will get them a bigger monthly payment for the rest of their life.

Many are eager to start their retirement as soon as possible, and they want or need the Social Security income to do that. Some want to claim their benefits and invest the money to further grow their nest egg. Increasingly, people fear the Social Security trust fund will be depleted before they get their fair share. And then there are those who simply aren’t aware of how much bigger their monthly payment could be if they delay.

The bottom line is that you can get your benefits as early as 62, and a lot of people do. That choice, however, can result in a permanent reduction in benefits — as much as 30% less than what you could receive by filing at your full retirement age (FRA). And retirees who file after their FRA receive a delayed retirement credit of 8% per year until they turn 70 (opens in new tab).

That’s a big deal.

Yes, eight years — from 62 to 70 — is a long time to wait to tap this significant income stream. But who doesn’t want more money? Especially these days, as baby boomers face a chilling trio of challenges that could put even the best-laid income plans to the test in retirement:

1. Longevity

The longer you live, the greater the risk that your nest egg will have to weather multiple financial storms, from recessions and bear markets to rising taxes and inflation, and costly health care issues as you age. Based on the Social Security Administration’s life expectancy calculator (opens in new tab), the average 62-year-old woman born on Jan. 1, 1958, can expect to live another 23.5 years, and a man with the same birthdate can expect to live another 20.7 years. That’s a long time to have to make your money last. But if you maximize your Social Security benefits by earning delayed retirement credits, you’ll always have that guaranteed income to count on.

2. Low interest rates

Looking for some nice, low-risk investments to transition to as you head toward retirement? Good luck. In our current low-interest environment, the return on “safe” investments — CDs, bonds, money market accounts — won’t protect you from inflation. And according to Federal Reserve Chairman, Jerome Powell (opens in new tab), we can expect those low rates to last until at least 2023. That means one of the best investments retirees can make right now isn’t really an investment at all — it’s growing their Social Security payments by waiting to take them.

3. Decline in employer pensions

The retirement savings system in the United States traditionally has been built on three pillars: Social Security, a workplace pension and individual savings. But many employers have stopped offering pensions, and the full responsibility for retirement investing has been shifting for years to the shoulders of employees with defined contribution plans. How’s that working out? A recent study by the National Institute on Retirement Security (NIRS) found that a whopping 40.2% of older Americans (opens in new tab) now depend on Social Security alone for income in retirement. Only 6.8% receive income from a defined benefit pension, a defined contribution plan and Social Security. And according to data from Fidelity Investments (opens in new tab), the median 401(k) balance in the second quarter of 2019 was $62,000 for savers in the 60 to 69 age group.

There are more than 500 ways for a married couple to claim Social Security — and sometimes it makes sense for one or both spouses to file early or at their full retirement age instead of waiting until age 70. If you’ve lost your job and you need the money, or if you’re in ill health and must retire, you may feel you don’t really have a choice. And if anxiety about the future of Social Security is keeping you up at night, you may decide it’s worth claiming early just to ease your mind. (Although in my opinion, and many others agree, it’s extremely doubtful that our government would pull the rug out from those who are already old enough to claim Social Security.)

If you’re waffling, it can pay off, literally, to run the numbers. Talk to your financial adviser about your “break-even” age — the age when you’d come out ahead by waiting instead of claiming early. If you haven’t already, sign up with the Social Security Administration (opens in new tab) to get an estimate of your retirement benefits at 62, 67 and 70. And check out the SSA’s online benefits calculator.

As you look at the numbers, consider whether you’ll find another guaranteed investment with a similar return. (Not to mention one that offers a cost of living adjustment, survivor benefits and tax-favored status.)

If your goal is to get the biggest possible piece of pie — and you can manage it — waiting is the way to go.

Kim Franke-Folstad contributed to this article.