Social Security offers one of the best forms of retirement income: a tax-advantaged source of income that lasts a beneficiary’s lifetime with inflation protection and survivor benefits.
For most people, benefits provide about 30-35% of pre-retirement income. In an uncertain world with fewer covered by pensions, dwindling 401(k) balances, and possibly less job income due to forced early retirement and layoffs, the option of collecting Social Security as soon as possible is attractive.
Often people will ask when is the optimal time to start receiving benefits. Many apply for benefits as soon as they are eligible at age 62. The average age when people start collecting is just over 63 1/2.
Social Security benefits are based on lifetime earnings. Real wages are adjusted to account for inflation. And then the average monthly earnings during the highest earning quarters over the previous 35 years are used to determine a basic benefit or “primary insurance amount” called the PIA.
The PIA determines how much you receive at full retirement age: age 65 or older, based on a person’s date of birth. If one elects to collect benefits before full retirement age, the monthly benefit is reduced by approximately 6.7% per year. For someone with a full retirement age of 66 who retires at 62, you can expect to receive only 75% of the total benefit. On the other hand, someone who delays receiving greater credit benefits. Therefore, waiting until age 70 can result in 32% higher monthly payments or 8% per year for the four-year delay in this example.
A number of factors will influence this personal decision. In general, the longer collection can be delayed, the higher the monthly benefit that can be received. Since women tend to live longer than men, women may benefit more from higher payments later. So if a single woman can afford to meet lifestyle needs from other sources, delaying is a reasonable option. For single men or women, family longevity and personal medical history may be the deciding factors.
For those who are married, benefits are based on each spouse’s income record. For spouses who do not have their own income record, the benefit is based on the working spouse’s 50%. The spouse’s survivor’s benefit is equal to the monthly benefit of the higher-earning deceased spouse. By falling behind, the spouse will be eligible for a potentially higher benefit.
Two little-known strategies can actually increase benefits for beneficiaries.
Claim and Suspend:
This option was a result of the Senior Citizens’ Freedom to Work Act of 2000 and gives the beneficiary the option to change their mind. This is ideal for those who are eligible to start collecting, but have determined that they do not need the full benefit now.
This strategy offers three ways to add to the personal bottom line for a worker who has reached Full Retirement Age (FRA): o Enroll in Social Security and allow a spouse to claim a spousal benefit now. o Suspend the receipt of benefits by the worker who can now continue working and increase the deferred retirement credits. By delaying receipt by the worker, the amount that this worker will be entitled to collect each month continues to grow by 8% per year until age 70. o If a beneficiary using this strategy dies, the higher increased benefit passes to the surviving spouse.
Claim Now, Claim Later:
This option works best for married couples who have their own work record and have reached each beneficiary’s respective full retirement age.
In this option, a worker can claim a benefit based on 50% of their spouse’s PIA while continuing to work and increased deferred retirement benefits by 8% per year on the worker’s own record, ideally up to age 70. Later, the spouse can switch from a spousal benefit to claiming a benefit on their own work record, presumably if they are older.
Conclusion:
Deciding to delay benefits really pays off when a beneficiary lives long enough to maximize the benefit, either equal to or longer than the actuarial age. For those who are 65 years old, life expectancy is about 19 more years on average or up to 84 years, slightly more for women and slightly less for men.
For women who survive to old age, a higher-earning spouse who delays receiving benefits can mean the difference between poverty or not for the surviving spouse.
