When should I start my Social Security benefits? I am asked this question frequently and find that many otherwise rational individuals don’t actually look at any data or analysis when making this important decision. As a financial planner, I have the tools to help you take a closer look at all your options to make an informed choice, rather than relying on heuristic biases. The first step, though, is to understand what happens when you start at age 62, 66, or 70. And that’s what today’s post aims to accomplish.
74% of Americans start their Social Security benefits early, before the Full Retirement Age (FRA) of 66 (for individuals born between 1943-1954). Starting at age 62 will result in a reduction in benefits to 75% of your primary insurance amount (PIA). If you wait past age 66, you will receive Delayed Retirement Credits (DRCs), equal to 8% a year, or a 32% increase for individuals who wait until age 70. Many of the individuals who wait until age 70 do so because they are still working. However, even for individuals who retire at age 62, it may make sense to delay benefits to age 66 or 70 and live off other sources of income, in order to receive a higher future Social Security benefit.
Delaying from age 62 to 70 offers a 76% increase in benefits. For example, someone with a PIA of $1000 a month would receive this amount at age 66, but would receive $750 at 62 or $1320 at 70. While COLAs or additional earnings will increase your benefits regardless of when you start, a 2% COLA is obviously going to produce a higher dollar increase if your benefit amount is $1320 rather than $750. So in nominal dollars, the difference between 62 and 70 typically exceeds 76%.
For single individuals, the decision is relatively straightforward. Social Security was designed so that a person with average life expectancy will receive the same benefits regardless of whether they start at age 62, 66, or 70. On an individual level, if your life expectancy is above average, you will receive greater total lifetime payments by delaying benefits until age 70. And if your life expectancy is below average, you will not have enough years of higher benefits to make up for the lost years, so you should start benefits earlier. The breakeven for delaying from age 66 to age 70 is between age 83 and 84. Delaying from 62 to 70 creates a breakeven between age 80 and 81.
Since 74% of recipients start benefits early, the behavioral bias is that people are underestimating their life expectancy. It should be 50% – half of us will live shorter than average and half will live longer. Unfortunately, many of the 74% will live longer than average and their choice means they will receive lower lifetime benefits than if they had delayed to age 66 or 70.
In addition to life expectancy, the other consideration for a single individual is if they have other sources of income. If he or she can get by with withdrawals of 4% or less from their portfolio from age 62 or 66 to age 70, then I would encourage them to delay the Social Security benefits.
Delaying benefits will reduce the future withdrawals required from their portfolio and increase the likelihood that their portfolio will be able to provide lifetime income. When I run Monte Carlo analyses for clients, those who fund a larger percentage of their needs from guaranteed payments like Social Security (or a Pension) have a greater probability of success than retirees who are more dependent on portfolio withdrawals. A larger Social Security benefit reduces the impact from poor potential outcomes in the stock and bond markets, or from an initial drop in the market, called Sequence of Returns Risk.
For married couples, the decision to delay benefits becomes more complex. Neither your Social Security statements nor the calculators on the SSA.gov website help with coordinating spousal benefits. Often, it may make sense to delay for one spouse but not for the other.
A general rule for couples is that you should consider maximizing the higher earning spouse’s SS benefit amount by delaying to age 70. The larger benefit will become the survivor’s benefit, so in effect, the higher earner can consider his or her benefit to be a joint and survivor benefit. And if the spouse is younger or has a high life expectancy, than delaying to age 70 for the higher earner may be an even better idea, in terms of actuarial odds.
Social Security is a good hedge for portfolio performance and an 8% guaranteed increase for delaying one year is a valuable benefit. I looked at quotes this month for immediate single-life annuities and for a 66-yr old male versus a 67-yr old, the rate increase was only 2.2%. Delaying from 66 to age 70 increased the annuity benefit by 12.2%. That gives you an idea of how exceptionally valuable the 8% annual increase is (or 32% for waiting four years), given the low interest rate environment we face today.
Aside from the principle of delaying the higher earning spouse, it is difficult to make other generalizations about delaying to age 70 as the details of a couple’s specific situation typically determine the best course of action. I use financial planning software to analyze your options and suggest an approach to coordinate your benefits into your overall financial plan. There are two tools which married couples might consider to provide some often-missed benefits as one or both defer to age 70.
The first tool is the ability to file and suspend. At full retirement age (66), you can file for benefits but immediately suspend the payments. This enables your spouse to be eligible to receive a spousal benefit, while you can continue to receive deferred credits for delaying to age 70. This is typically used if the spouse does not have any SS benefit based on their own earnings, or if the spouse’s individual benefit is less than the spousal benefit amount (half of the first spouse’s PIA, if the second spouse is at FRA).
If a spousal benefit applies, it is important to know that DRCs are not added to a spousal benefit. While the primary spouse will receive the 8% increase after age 66, the spousal benefit does not increase. So, if the spouse is the same age or older than the higher earning spouse, it is important to not delay the spousal benefit once both are age 66.
The second tool is a restricted application. At FRA, a spouse may restrict their application to receive only their spousal benefit amount and still earn Deferred Retirement Credits on their own benefit. Then they can switch to their own benefit at age 70. However, to receive any spousal benefit, the other spouse must be currently receiving benefits. This works if you want to delay from age 66 to 70 and if your spouse is already receiving benefits (or has filed and suspended).
These two tools provide a benefit from age 66-70 which many people miss. Both techniques will allow one spouse to defer their individual benefit to age 70 to maximize their payment amount (and potentially, the survivor’s benefit amount), while receiving an additional benefit for those four years. If you might benefit from either of those tools, don’t expect the Social Security Administration to tell you. And if you miss those benefits, you’ll lose free money that you can’t get later.
