When to claim Social Security benefits is a dilemma that most Americans are faced with. There are no right and wrong answers for every situation. However, there are a number of things to keep in mind, such as the reduction in benefits if one claims before full retirement age, the potential increase in benefits if one waits until age 70 to claim benefits, and the impact that those decisions have on the cost of living adjustments that a benefit recipient will receive.
If you’ve only ever glanced at the statements that Social Security provides, it’s worth a second look, because there is a lot of good information on the statement. However, beginning in 2017, Social Security stopped sending paper statements in the mail unless you were over age 60, not currently receiving benefits and didn’t have a My Social Security account. For everyone else, the only way to view a current statement is to create a My Social Security account on the website www.ssa.gov. Once you’ve created an account you then are able to view a current statement whenever you log in to your account. In the “Your Estimated Benefits” section, it will show you projected benefits for full retirement age, age 70 and age 62. Age 62 is the earliest that you can begin receiving benefits and age 70 is the latest that benefits can begin.
It’s important to consider that for each year before full retirement age that you elect to begin benefits, you will receive about 7% less in annual benefits. This is designed to be an actuarial neutral calculation; in other words, lower benefits paid for more years vs. higher benefits for fewer years. But that doesn’t tell the full story. Social Security is somewhat unique in that it is an inflation-adjusted stream of retirement income. While inflation increases have been relatively low in recent years due to very tame inflation numbers, the intent of Social Security is to provide the same purchasing power the last year that you receive benefits as the first year you received benefits. If you elect to begin benefits as soon as possible at age 62, you also are accepting lower cost of living adjustments for the rest of your life (same percentage increase, but applied to a lower benefit amount). It’s not unreasonable to think that this could last for 30 years for someone claiming at age 62. For every year after full retirement age that you defer starting benefits, an 8% deferred retirement credit is applied, so the benefit at age 70 could potentially be 32% higher for someone whose full retirement age is 66.
Consideration should always be given to one’s health, because if someone expects to have a shorter life expectancy, the argument can be made that benefits should begin as soon as possible. Break-even calculations can be performed that project an approximate age that someone would have to live beyond to have been better off waiting to claim benefits. However, this also can impact a spousal survivor’s benefit, which is the higher of the each of the couple’s benefits. If the higher earner has a shorter life expectancy and begins benefits early, it will mean a lower lifetime benefit for the surviving spouse.
Finally, consideration also needs to be given to what sources of income and/or assets are available to someone who defers starting their Social Security benefit. While it may be difficult for someone to completely rely on their investment portfolio to provide for their income needs until age 70, studies have shown that deferring to age 70 allows the investment portfolio to last the longest (“Social Security: When to Start Benefits and How to Minimize Longevity Risk,” Reichenstein and Meyer, March 2010, Journal of Financial Planning). There is an increased demand on the portfolio until age 70, but then when benefits begin at age 70 the demands are lessened, especially since the now higher percentage of one’s retirement income provided by Social Security will also be indexed with inflation.
The question of when to file for benefits is not as cut and dried as how long you expect to live. There are many aspects to consider that ultimately will determine the optimal time to start benefits. A Certified Financial Planner™ professional can help you take all of these things into consideration and help you make the best decision with the information that is available.
For additional information on Social Security, contact Budros, Ruhlin & Roe.
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