The future of Social Security scares many people. The common perception is that every dollar of benefit earned through a working lifetime may not actually be received if future benefits are reduced.
This leads too many people to apply for Social Security benefits too early, potentially jeopardizing their own long-term financial security by doing so.
Concern that benefits will disappear is misguided for anyone over 60 today. That hasn’t stopped the great majority of people from taking Social Security before their full retirement age and voluntarily accepting a permanently reduced benefit.
This conflicts with many people’s concern about not getting all they are due after paying Social Security taxes on their earnings over the years. As it turns out, most people are not actually interested in maximizing their Social Security benefits. The Social Security Administration reports that 74 percent of current retirees receive a reduced benefit. The reduction in benefits may not seem like a lot in a single Social Security check or even a year’s worth of benefits, but considered over a full retirement, it’s big. The Financial Security Project administered by the Center for Retirement Research at Boston College suggests that people claiming Social Security at 70 instead of 62 receive as much as 76 percent more annual income.
Of course, some people cannot survive financially without beginning to receive benefits early. Health or employment considerations may necessitate that you start when first eligible at age 62, or at some point before your full retirement age (between 65 and 67 depending on what year you were born).
But for those who are in a position to optimize their retirement income, the reward for patience is clear. One of the great benefits of Social Security retirement income is that unlike most pensions or annuities, it comes with a cost of living adjustment to combat inflation. The longer you wait to start, not only will the base benefit be larger, but the inflation adjustment will be applied to this larger number, increasing the reward of waiting. These growing payments lead to a breakeven point at which you will receive more in total retirement income by waiting longer for larger checks instead of accepting the reduced standard of living of smaller ones over a longer period. In most cases, you only have to live past about age 82 to make waiting pay off.
Not everyone lives into their 80s. But for those with relatively good life expectancy, waiting for bigger Social Security benefits serves as guaranteed longevity insurance. It’s like a lifetime annuity, except it comes with inflation protection and no new cost. You’ve already paid for it via your payroll taxes. Sure, if you die before the breakeven you collect less than you could have. But the alternative – long life and insufficient income – is worse and should be the bigger fear.
COUPLES PLANNING IS KEY
In some cases, it will be important to think beyond your own life. Especially in the case of the higher earning spouse – certainly if that spouse is older – it can create more financial security for the surviving spouse by waiting until later to claim Social Security. This way, at death, the surviving spouse steps up to receive a higher benefit.
Wives outlive husbands by about seven years on average, and most widows get their husband’s higher monthly benefit instead of their own. A husband therefore increases the benefit his surviving spouse receives by more than 20 percent if he claims Social Security at 66 and not 62. That edge can climb to 60 percent if he waits until 70.
YOUR DECISION POINTS
If you are thinking about starting Social Security, ask yourself these questions:
• Do I need a Social Security check each month to make ends meet?
• How long do I think that I will live?
• Who else depends on a Social Security check based on my working history if I die?
• How important is Social Security to my long-term financial security in retirement?
The answers to these questions will help you determine the best choice for your retirement income needs.
And don’t let doomsday scenarios distract you. Projected Social Security funding problems are still 25 years out.
Even though politics and logic don’t seem to mix well, it seems unavoidable that relatively simple alternatives to stabilize Social Security will be implemented before too long. And those alternatives are highly unlikely to change the amount received by anyone 60 or older today.
Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, a registered investment adviser in Old Town Tacoma. Reach him at gary@bhjadvisors.com.
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