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 social security retirement planning 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.
About fifty 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. Given the structure of the Social Security payment system and increasing longevity, this is usually not the optimal decision for the average person to make when preparing for retirement.
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 Social Security retirement pension payments tends to be more advantageous. This is a decision that you should weight carefully, especially if you are making a decision on your own and do not have access to a Social Security advisor near you who understands the tradeoffs. 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 to decide on your best personal retirement plan, before accepting your 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 Social Security retirement annuity 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 retirement planning 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 retirement income and no retirement pension or 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. Even then, you might first be able to qualify for Social Security disability payments up until your full Social Security retirement age, when your payments would be converted automatically from the Social Security disability system to the Social Security retirement system.
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 greater urgency in preparing for retirement. 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.
Too many retirees claim Social Security retirement benefits early
Social Security Administration statistics for 2018 and for prior years and decades are not encouraging in this matter. Despite the fact that delaying receipt of Social Security payments until age 70 would be advantageous to most people, in 2018, about 27% of eligible men and 31% of eligible women took their benefits at age 62, when they were first able to claim retirement benefits. These people locked in the lowest possible monthly retirement check they could have had. Furthermore, by doing this they also locked in lifetime cost of living adjustments based upon the lowest monthly benefit amount, as well.
An additional 22% and 24% of men and women, respectively, took lower benefits after age 62 but before reaching their full retirement age (FRA) of 66. Only 36% and 31%, respectively, waited until their FRA, and these full retirement age percentages include 17% of men and 16% of women who were in the Social Security disability system when they reached their FRA and were then automatically converted to the Social Security retirement system. From the 2018 statistics, 85% of men and 86% of women first claimed Social Security retirement benefits at or before their full retirement age.
Only 15% of men and 14% of women waited until after their full retirement age to claim higher benefits. A Scant 5% of men and 6% of women waited until age 70 to claim the highest entitlement check, which also entitled them to higher cost of living adjustments in future years. The other 10% and 8% of men and women, respectively, claimed sometime between age 66 and 70.
Source for this section: “Annual Statistical Supplement to the Social Security Bulletin, 2018 (SSA 2018, Table 6.B5)
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 retirement planning 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
• http://crr.bc.edu/special-projects/books/the-social-security-claiming-guide/
• 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
