Claiming Social Security – The Six-Figure Decision

Your Social Security benefit will likely be one of your largest and most important sources of income during retirement. What we know about Social Security benefits are that they are:

·       Guaranteed by the federal government

·       Cannot be outlived

·       Are provided a cost of living adjustment based on an inflation index.

These are very valuable benefits, and over a lifetime can amount to hundreds of thousands of dollars. What we also know about Social Security benefits are that the rules are complex and the options for taking or “claiming” Social Security are many. For instance, you can start Social Security benefits as early as age 62, can defer taking benefits to as late as age 70 or can claim them at any time in between. The normal age for taking Social Security (what is called the full retirement age or FRA) is between 66 and 67 depending on the year you were born. Claiming benefits before FRA will result in a permanently reduced benefit of as much as 30% while delaying to age 70 will result in a permanently increased benefit of up to 32%. This is a very wide range, and the age you select can mean a difference of over $100,000 of lifetime benefits depending on how long you live.

For example, take Ron Retiree who is just turning 62. His benefit at age 66 which is his full retirement age would be $2,300 per month. If Ron decides to take benefits at the earliest age of 62, he will receive a reduced benefit of $1,725 per month. But, if Ron waits to take benefits until age 70, he would receive a benefit of $3,036 per month. So, which is the best option? The problem is complicated as we do not know how long we will live. Should Ron die prematurely, taking the benefit as early as possible is the best choice. However, should Ron live a very long life, delaying until 70 is the best choice. So, let’s assume that Ron lives until his normal life expectancy of around age 85. In this scenario, taking early provides Ron with a lifetime income of about $525,000. If Ron had delayed until age 70, he would have received about $650,000 of lifetime income. This is a $125,000 (or six-figure) difference in the amount of income received. Clearly, making the right choice of claiming strategy has a very large impact on the amount of lifetime income you can expect. While estimating life expectancy is a big factor in determining when to claim Social Security, it is not the only one. We also need to examine joint life expectancy if you are married, whether you have other income sources that would allow you to delay, and whether you will continue to work even if you turn on Social Security early.

We encourage to attend one of our complementary educational seminars on “Maximizing Social Security” that we will be conducting this fall. Please visit the events section of this website for dates and locations of our upcoming sessions.