Deciding when to begin initial Social Security retirement payments

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Deciding when to begin initial Social Security retirement payments

In general, whether to accept Social Security payments early, at full retirement age, or later is a decision you will need to make as you approach retirement. This decision can depend upon many factors, including but not limited to your expected cash flow requirements, your health and personal life expectancy, your earned income and asset income in retirement, your tax rates, speculation about future changes in Social Security payment rules, etc.

Over seventy percent of retirees elect to receive their initial Social Security retirement payments prior to their full Social Security retirement age, instead of waiting until a later age to accept higher payments. Despite the behavior of this majority, given the structure of the payment system and increased longevity, this is usually not the optimal decision for the average person.

Academic research papers indicate that waiting at least until ‘full’ retirement age (66 to 67 years depending upon one’s age), and beyond, to accept initial retirement payments tends to be more advantageous. This is a decision that you should weight carefully. Nevertheless, there would be no financial advantage in waiting beyond age 70 to accept Social Security retirement payments, even if you were to continue to work. Currently, monthly payment amounts do not rise beyond age 70, and this means that a payment not accepted beyond age 70 is simply a payment foregone.

In determining when to first accept Social Security retirement payments, there are a variety of factors that should be considered. The following paragraphs introduce some of these factors, and this summary information should be viewed as a strong indication that one should investigate the situation thoroughly, before accepting one’s first Social Security retirement payment. When you understand the factors that influence the Social Security claiming decision, you can make a better decision for your particular financial circumstances.

As a pre-retiree approaches his or her 60s, careful research and a thorough understanding of the facts is critical to making an optimal decision. Grabbing one’s first available monthly Social Security check at age 62, just because it is there for the taking, could be among the worst lifetime financial decisions one could make.
Some retirees misunderstand the adequacy of the Social Security trust fund and think that they should “take a bird in the hand,” because there will “not be two in the bush,” if they delay beyond age 62. The opposite is much more likely to be the case. The structure of the Social Security system is designed to promote fairness within particular age cohorts, and it is very likely that this principle will be maintained even if some aspects of the Social Security system are adjusted in the future to ensure solvency.

Nevertheless, if a pre-retiree has no other income and no investment funds, and thus has to start Social Security retirement payments at age 62 to survive, then this could be the only path available. Such a survival situation might be the result of some personal financial catastrophe, such as, a disability that cuts earned income short, major uninsured health problems that drain one’s savings, etc.

If a person would have to take Social Security at age 62 due to lack of savings and income and he or she is not yet 62, then perhaps any amount of early warning might induce better preparations. This person could increase savings and take other steps to improve financial preparations for retirement, so that when retirement arrives deferring Social Security retirement payments would be feasible.

Recent statistics in this matter are not encouraging. Despite the fact that delaying receipt of Social Security payments until age 70 would advantageous to most people, 44% of eligible men and 49% of eligible women took their benefits at age 62 and locked in the lowest possible monthly retirement check they could have had.

Furthermore, by doing this they also locked in their lifetime cost of living adjustments based upon a lower monthly benefit check amount. An additional 26% and 25% of men and women, respectively, also took lower benefits after age 62 but before their full retirement age (FRA), which is around 66 for recent retirees. Only 13% and 9%, respectively, waited until their FRA, and a scant 1% and 1% of men and women, respectively, waited until age 70.

Each year of delay in accepting Social Security retirement payments increases the check and establishes a higher cost-of-living base for future inflation adjustments

When one has other financial resources to meet interim expenses that would allow one to delay Social Security payments, for each year of delay in accepting payments between age 62 and age 70 the monthly retirement check will increase by approximately 8% per year in real, non-inflationary dollar terms — while the monthly payment base for cost-of-living protection increases concomitantly. This is an unusually attractive financial proposition for those who understand it, and who can afford to take advantage of it.

In effect, the Social Security system is set up so that retirement payments are neutral for a single taxpayer with a life expectancy of 84 who could accept payments before or after full retirement age and who would otherwise receive a 3% real dollar rate of return on invested assets. This sets the break-even age for delaying the receipt of payments, but like so many other things in lifetime financial planning, it is “just not that simple,” because other important factors are in play.

For single people with health problems that make survival until age 84 questionable, perhaps accepting payments before age 70 might makes sense – even if that person has alternative financial assets to draw up until they reach 70. Others who have alternate financial resources that allow them to wait one or more years beyond age 62 up to age 70 for their first payment might do better — sometimes far better. For men and women who have reached age 60 already, individually their life expectancies are more likely to be beyond age 84 than not to be.

For married couples, the life expectancy of the longest surviving spouse is a key consideration

Furthermore, for married couples, the life expectancy of the longest surviving spouse could be the key consideration. Social Security claiming strategies need to take into consideration joint life expectancies, and among a couple that has already reached 60, the joint life expectancy of the longest-to-survive spouse could easily be in his or her 90s. In addition, if one spouse happens to be significantly younger than the other, then joint life expectancy of the surviving spouse could be even longer.

Furthermore, those who accept Social Security checks early, but who continue to work, are hit with significant increases in income taxability of benefits. In addition, those who do not delay payments miss the opportunity to draw down their assets held in traditional tax-advantaged employer-sponsored and IRA retirement accounts during the period between when they stop working and age 70.

Drawing down traditional tax-advantaged retirement plan and IRA assets in this “income gap” period can significantly reduce Required Minimum Distributions after age 70 and ½. This strategy can lower retirement income tax obligations during retirement and may even lower one’s federal and state marginal income tax brackets. Are you getting the sense of why this might be both complex and why it is important to make a careful decision?

• Note that for couples who have both worked and could claim on their own work records or as the spouse of the other person, there is increased decision-making complexity. Spouses who earned significantly less can claim on their own earnings records or they might claim as the spouse of the higher earner. When the higher earner delays acceptance of payments, the long-term benefits to both partners can increase, which again points to the subject of joint life expectancies rather than just single life expectancies. You can find more information about claiming strategies on the Social Security Administration website. In addition, you can look at The Center for Retirement Studies at Boston College has some useful information for people regarding retirement benefit acceptance strategies. See:

Find a link to the Boston College Center for Retirement Research

• Note also that there used to be a multi-year Social Security “do-over” that you may find discussed in some outdated documents. However, this overly generous do-over is no longer available. Remarkably, with this obsolete do-over, a person could have started Social Security retirement payments at any eligible age, then could have changed their mind and could have paid back all the money received without interest! Then, this person could have restarted payments at the higher benefit level of an older age. While this was a great deal for those who understood it and who could afford to pay back what they had received, this service was abused by some and imposed significant extra work on Social Security Administration. In December of 2010, this “do over” was restricted to a one-time exercise and only within a one-year period after a retiree had initially started benefits, making it far less attractive.

The decision to delay receipt of Social Security payments from age 62 to age 70 could lengthen the durability of a retirement portfolio by as much as ten years or more

An April 2012 Journal of Financial Planning study entitled “How the Social Security Claiming Decision Affects Portfolio Longevity” by William Meyer and William Reichenstein is well worth reading. This study was intended to contribute to the literature on sustainable portfolio withdrawal rates in retirement by adding Social Security retirement payment timing and taxation to the discussion. Particularly, for those who have accumulated a smaller portfolio of investment assets by retirement, Meyer and Reichenstein reached several important conclusions.

Regarding longevity of a retirement portfolio, they concluded that the decision to delay receipt of Social Security payments from age 62 to age 70 could lengthen the durability of a retirement portfolio by as much as ten years or more. This means that simply delaying receipt of Social Security payments — with all other financial factors being equal — could support an additional decade of expenditures. This addresses perhaps the number one worry of most retirees — running out of money, if they were to live a very long time.

Find a link to “How the Social Security Claiming Decision Affects Portfolio Longevity”
by William Meyer and William Reichenstein


The true value of delaying Social Security is a triple-benefit of hedging longevity, poor returns, and high inflation

Extending the conclusions of this Meyer and Reichenstein study, Michael Kitces published a May 1, 2012 Advisor Perspectives commentary entitled “The Asymmetric Value of Delaying Social Security Benefits.” Kitces’ commentary is also worth reading in its entirety. He summarized his observations this way: “In addition, delaying Social Security not only hedges longevity, it also hedges two other adverse scenarios that are otherwise harmful to the retiree: unexpectedly high inflation and unexpectedly low returns. … the true value of delaying Social Security is a triple-benefit of hedging longevity, poor returns, and high inflation, because of the asymmetrical way that delayed higher benefits compound in the later years. It won’t necessarily win for every client, but as any good hedge would, it wins the most in the times the client will need it the most.”

Find a link to “The Asymmetric Value of Delaying Social Security Benefits” by Michael Kitces

US Social Security Administration — Financial Literacy Initiative

In 2009, the Social Security Administration established the Financial Literacy Research Consortium (FLRC) to do the following:

• help foster retirement and other saving strategies at all stages of the life cycle,
• help low and moderate income populations successfully plan and save for retirement and other life events, and
• improve understanding of Social Security’s programs.

Find the Financial Literacy Initiative on the US Social Security website

The FLRC consists of three non-partisan, multidisciplinary research centers at Boston College, the RAND Corporation, and the University of Wisconsin. In part because the Boston College Center for Financial Literacy is held within the larger and already established Center for Retirement Research at Boston College, this one of these three FLRC centers has a particularly rich list of documents that are of practical use to individuals who are making decisions about Social Security for their families. The following is a link to the BC Center for Financial Literacy. Once you are at this center’s website, also look around more broadly on the CRR website, because it offers a wealth of interesting and useful retirement information.

Find the Boston College Center for Retirement Studies — Financial Literacy Project

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