It’s a big decision, one we’ll all have to make: Should I take Social Security as soon as I’m eligible, at age 62, or wait till I’m 66 … or even 70, when I would receive the maximum benefit?
The answer is not as simple as you might think. And the consequences are enormous.
“It’s a decision that will be different for everyone,” says David Blanchett, head of retirement research for the Morningstar Investment Management Division.
As important as Social Security is to many people’s post-retirement finances, it’s given little thought in retirement financial planning, says Jeff Bucher, president of Citizens Advisory Group in Perrysburg, Ohio.
“Most of the time, it’s put on the back burner,” he says. “It is a huge benefit to people’s lifestyles. It is important that we look at all the options.”
“It probably is the least-evaluated decision for retirees but has more complexities than people are aware of,” says Jack Tatar, author of several books on retirement, including Safe 4 Retirement.
“Most people take it at 62,” he says. “They end up losing in the long run. If they delay it till 70, they will get 30% more. Unfortunately,” he says, “most Americans can’t do that.”
Improper timing can cost you $100,000 to $150,000 over a lifetime, says John Gajkowski, of Money Managers Financial Group in Chicago.
When should you take it?
If you delay taking Social Security, it increases your monthly benefit about 8% a year until you’re eligible for the maximum at 70. Most financial planners pretty much recommend that you do that if you can, or delay at least until age 66. But most people can’t delay.
Some quick facts:
•Many people — 41.4 % — take the benefits as soon as they’re eligible at age 62, according to Social Security Administration.
•Half of Americans 65 and older rely on Social Security for at least 50% of their family income; 23% rely on Social Security for 90% or more of their family income, according to the AARP Public Policy Institute.
•Minorities are less likely to receive benefits, and when they do, are more likely to be more dependent on them, says Gary Koenig, director of economic security in AARP’s Public Policy Institute.
Koenig says many people don’t realize how modest Social Security benefits are. “You look at the average benefit that a retired worker is getting, and it’s $15,000 a year,” he says. “If you wait till you’re 67 and are in the highest income group, you won’t receive more than $30,000 a year.”
Morningstar’s Blanchett wrote a report, “When to claim Social Security” in The Journal of Personal Finance. He said his analysis suggests that the advantages to delaying the Social Security benefits can be significant. Still, he cautions, every case is different.
“We find that females, married couples, retirees who expect to invest in relatively conservative portfolios during retirement, and retirees who have longer life expectancies are likely to benefit most from delaying Social Security benefits.
“On the other hand, retirees who have shorter life expectancies or invest more aggressively and believe they can achieve a relatively high return on their retirement portfolios would likely be better off taking Social Security earlier,” he says.
Dedrick Muhammad, senior director of the Economic Department at the NAACP, says despite the lower life expectancy for African Americans, especially men, he still recommends they delay. If you’ve already lived to be 62 or 65, your life expectancy is likely to be longer, he says.
“A lot of people can’t delay till 70 and can’t delay till 65. If that’s what your economic situation demands, then you should do that. But if you can afford to wait, then you should wait.”
Adds Tater: “There will always be the people who have to take it. If you are in a situation (where) you don’t have to take it, look at the numbers and decide.” He says there is more to it than deciding on 66 or 70. “Take a good, hard look at timing on the year and the month.”
“If you don’t think you will live long, it makes sense to claim early,” says Bucher. “The standard break-even point is 80 years old. If you don’t think you’ll live past 80, you’re better off claiming earlier. If you are married and think one of you will live past 80, it might make sense to delay,” he says.
“The most important thing about Social Security timing is there is not a one-size-fits-all,” says Gajkowski. “It’s an individual issue.” He said his firm looks at many scenarios, including genetics and life expectancy, marital status and tax considerations.
Bucher says he uses a variety of strategies to advise clients on Social Security. One is a switching strategy, which allows one spouse to claim another’s benefits. For example, he has a married client who is 67 and doesn’t need the benefits. He can claim his wife’s benefits until he’s 70, and let his own benefits continue to grow. When he turns 70, he can switch to his own benefits.
Another switching strategy: A divorced client who is 67 had been married for at least 10 years. She can claim her ex-husband’s benefits until she reaches 70, then switch to her own.
“This decision should be part of an overall plan,” Bucher says. “Many people walk by this decision without thinking twice about all the different ways we can do this. For many (financial) advisers, advising on Social Security doesn’t bring revenue. It is critical that we do. It is the foundation of many people’s income. That’s the foundation of the plan.”
“Retirement age is whenever you retire,” says Blanchett. “You can’t claim benefits before 62, and there is no reason to delay after age 70.”