There’s a big financial advantage for those wait. For each year past your full retirement age that you can put off applying for Social Security, your monthly check will increase by 8 percent. However, there are times when it makes sense to retire before 70.
Perry Volpone was determined to follow the herd. All his friends started collecting Social Security benefits the moment they retired, and he saw no reason to do anything different. Yet Dana Anspach, Volpone’s newly hired financial adviser, argued against it. She urged the former retail executive, then 65, to put off applying for Social Security for five more years. Why? Because delaying it would increase his monthly benefit.
They went back and forth about this for the better part of a year. “We gave it a pretty good thrashing out,” recalled Volpone, who is now 73 and lives with his wife, Victoria, outside Atlanta. “I was anxious about it. Suddenly you’re no longer working, you don’t have money coming in anymore, and I was wrestling with ‘Why not take the benefit now?’ That would make me more comfortable. The whole thing is just so much more complex than you think.”
That probably shouldn’t come as a huge surprise. When you consider what the Social Security Administration does — providing a stream of retirement and disability income for about 63 million people, or 1 in 5 Americans — it’s bound to be complicated.
But the depth of its complexity remains jarring to many new and soon-to-be retirees. Should you start collecting Social Security the minute you’re eligible, at 62? Does it make more sense to wait until your official-sounding “full retirement age” (either 65, 66 or 67, depending on when you were born)? Or are you better off like Volpone, who finally assented to his planner and waited until he turned 70?
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There’s a big financial advantage for those wait. For each year past your full retirement age that you can put off applying for Social Security, your monthly check will increase by 8 percent.
Let’s say you aim to retire this fall at 62, having worked 40 years and ending up with a final salary of $80,000. Your benefit would come to $1,455 a month, according to the Social Security Administration’s website, ssa.gov. But if you could wait until 66, your full retirement age, you’d get $2,074 a month. At 70, it would be $2,833 — almost double the check you would get at 62.
“The terms for these deferrals began to be designed in the mid-1950s, and mortality was so different and interest rates were so different then,” said John Shoven, a Stanford University economics professor and an authority on Social Security. “What was a fair deal when it was introduced is really an outrageously good deal now.”
Still, most retirees don’t take advantage of it. Almost 60 percent of 2016’s new Social Security recipients began taking payments before their full retirement age. Around a third began the moment they were able, at 62.
Many may not be thinking through the consequences, Shoven said. “Collecting Social Security immediately when you stop working is just a habit or a social norm,” he said. “It makes no sense.”
Fears about the financial health of Social Security could be partly to blame. The Social Security trustees’ latest report estimates that the program will pay out more in benefits than it takes in this year, for the first time since 1982, and that it will exhaust its reserves by 2034.
The system “needs to change,” said Laurence Kotlikoff, a Boston University economics professor and retirement-income specialist. “But I don’t think anyone collecting benefits, or who’s even near to collecting benefits, has anything to worry about.”
“They’ll figure it out,” said Kurt Czarnowski, a Social Security Administration communications director turned retirement consultant. “The program is far too important in the history of this country.” He figures lawmakers will probably make ends meet with a mix of higher taxes and reduced benefits.
So is it always a bad idea to start taking Social Security benefits before 70? No. If working longer is impossible and you don’t have any resources to cover your current expenses, it makes sense. Or if you’re unmarried and have a medical condition that suggests a shorter life, perhaps it’s better to take the smaller payments now, while you can.
But married couples should not assume this is the best path if one spouse has a short life expectancy, Shoven said. The surviving spouse will continue to get Social Security, and the amount will be based on the higher earner’s benefit, even if the higher earner is the one who dies. The longer the higher earner can put off collecting that first check, the more money there will be for the surviving spouse.
A few million married Americans are still grandfathered into an old law that makes it smart to take some benefits early, Kotlikoff said. The maneuver is called a restricted application, and you must have been born on or before Jan. 1, 1954, to take advantage of it. It involves claiming a spousal benefit. Spouses are eligible to collect up to half their partner’s full-retirement-age benefit.
This is how the restricted application works: The higher-earning spouse delays receiving any personal benefit until 70 but, at his or her full retirement age, claims a spousal benefit based on the lower-earning spouse’s income. This benefit pays out until the higher-earning spouse reaches 70, at which point his or her own larger benefit kicks in.
Widows and widowers can use a similar strategy. So can divorced people born on or before Jan. 1, 1954. There are restrictions based on your age and the length of your marriage, but the short version is this: You may be able to claim a benefit based on your former or late spouse’s earnings while delaying your own benefits till later.
Kate Bickmore of Phoenix held off getting remarried for five years just to take advantage of this one. Bickmore, a client of Anspach’s firm, Sensible Money, lost her first husband, Les, in 2008. She was 50. A few years later she met and fell in love with another man. Anspach suggested that Bickmore hold off on marrying him until she turned 60. Under Social Security rules, remarrying at 60 or older allows her to collect a widow’s benefit while delaying her own benefit until later.
“Does it sound terribly romantic?” Bickmore asked with a laugh. “Perhaps not. But when I explained it to my husband, Dan, he was like, ‘Yeah, that makes sense.’ At our age, it’s not like waiting to be married is a hardship.”
Retirees with children who are under 18 or disabled may also have some incentive not to delay Social Security. These children are eligible for up to 50 percent of a parent’s benefit. Depending on the children’s ages, you might find that starting your own benefit before age 70, combined with the child benefits, works to your advantage in the long run. One wrinkle: You may bump into the family maximum benefit, which varies from case to case but is usually between 150 and 180 percent of the worker’s full-retirement-age benefit.
People struggling with decisions like these have many resources to draw on. Among the online calculators that can run all the math for you is maximizemysocialsecurity.com, the handiwork of Kotlikoff. It costs $40 annually per household. There are multiple free calculators, too, including ones from AARP and the investment advisory firm Financial Engines, though they are not nearly as detailed.
If you prefer interacting with live humans, there are financial consultants who specialize in Social Security. Czarnowski retired from the Social Security Administration eight years ago, figuring he would earn a little extra cash by making 10 or so presentations a year to people seeking guidance. Turns out there is a lot more demand than he expected. His consulting firm in Norfolk, Massachusetts, has been making an average of about 60 presentations a year, and in 2016 he did almost 140. He charges up to $1,500 for a group presentation and $250 an hour for one-on-one sessions.
Czarnowski is reluctant to offer specific advice, preferring instead to let clients know their options. When to start taking Social Security is “ultimately a longevity decision,” he said. “You can’t know the ‘correct’ decision unless you know when you’re going to die. So you have to make an informed decision factoring in items you do know — things like your health and your financial situation.”
Looking at it purely from a numbers standpoint, Shoven said there was no doubt what most people should do: Delay as long as possible. He suggests dipping into an individual retirement account or a 401(k) account if necessary — or even borrowing money against your home to cover your expenses for a few years — to get that larger Social Security payout.
“I would guess the number of people who shouldn’t defer is less than 10 percent,” he said.
Hearing Shoven’s advice and feeling regret because you already started taking Social Security? You might be eligible for a mulligan. Retirees who have been receiving benefits for less than a year can contact the administration and withdraw their claims, then wait until they’ve reached 70 to begin again. One downside to this do-over: You’ll have to pay back those benefits you have already received.