Social Security: The compelling case against filing for early benefits
Print this pagePosted on 20 January 2008 by Mark
Permanent URL of this article: http://retirementrevised.com/column/social-security-the-compelling-case-against-filing-for-early-benefits
The oldest baby boomer turned 62 this month and promptly signed up for Social Security. But it probably wasn’t a very smart financial move.
Dozens of news stories ran when Kathleen Casey-Kirschling—America’s oldest baby boomer!—-applied on January 1st to start receiving her monthly check. That’s what about half of all Americans do at 62. But for most, it’s a costly mistake that will mean foregoing thousands of dollars in lifetime benefits—in some cases, hundreds of thousands.
Here’s how it works.
You become eligible to claim benefits at age 62. But most Americans will receive larger lifetime payouts by waiting, if at all possible, until they reach age 66—or even 70.
Health is the key, because the math here all depends on how long you live.
When you file early, the U.S. Social Security Administration (SSA) reduces your benefit to avoid paying higher lifetime benefits to you than it does to someone who waits until the so-called Normal Retirement Age (NRA). Under the rules, your lifetime benefits will be reduced for most of the years you start early, based on an actuarial projection of your longevity.
Currently, the NRA is age 66 for anyone born from 1943 to 1954, and it’s slightly older for people born thereafter (a chart showing your NRA is here). Let’s say your NRA is 66 but you retired and started taking Social Security at 62. That means you retired four years early. The net effect: your benefits will be reduced permanently by a total of 25 percent.
“The benefit is forever reduced, so the longer you or
your spouse lives, the more you lose,” says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries.
If you can delay taking benefits beyond the NRA, the difference is even greater. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect: if you wait until you’re 70, your annual benefit will be 32 percent higher than it would be if you started at age 66—and in addition to the 32 percent, you also get all the cost-of-living adjustments (COLA) from the intervening years.
You’ll come out ahead so long as you—or your spouse—live past what’s called the “break-even” age. That’s the age where the total benefits paid to the patient ones start exceeding total payouts to those who take early benefits. That age, Gebhardtsbauer says, is around 80—and in the case of more than 80 percent of American couples, the husband or wife will live past that age, he says.
How does it add up to the hundreds of thousands of dollars I mentioned? It happens if you or your spouse lives many years beyond the breakeven age—and the numbers are compelling. “Say you commence taking benefits at age 62 instead of 70,” says Gebhardtsbauer. “Your total lifetime benefits would be lower
by $140,000 if you or your spouse lives to age 90. And if one of you lives to age
95, your loss would be $275,000.” (The calculations assumes an average Social Security benefit of $1,000 per month)
Take a deep breath—but believe it. Remember, Ron is an actuary and works with numbers for a living.
If you’re married, it’s most beneficial for the higher-earning spouse to delay taking Social Security benefits. Typically, that’s going to be men. The men tend to die at younger ages; when that happens, a woman’s Social Security benefit will be bumped up to the spouse’s higher benefit.
For older women, that can be an important increase, since it’s a time of life when overall income can decline sharply. Social Security is the sole source of income for 42 percent of single women over the age of 62, and older single women fall into poverty at a higher rate than most demographic groups in the country. The poverty rate for elderly single women is 23 percent, compared with just 5 percent for married retired people.
Says Gebhardtsbauer: “Waiting to take benefits isn’t just good for your wallet, it’s good for the country.”
RESOURCES: Click here for links to online calculators and tools that can help with your Social Security benefits planning.
Tags | planning, retirement, Social Security
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January 26th, 2008 at 11:50 am
Actuarial thinking is one thing but it can be beside the point when considering quality of life. Maybe you’ve calculated (correctly) that Social Security plus a pension (or 2) will be plenty for you to live on. Maybe your current means of livelihood is not your passion; maybe it is stressful and not enjoyable, and you ache to have more time to do the things you love. Maybe you have something you could sell part-time but your full-time job plus other obligations doesn’t leave enough time to grow a small business, and, if you had social Security and some part-time income, you’d be just fine finanacially and happier? Under any of these circumstances, why on earth wait to begin social Security?
January 26th, 2008 at 1:22 pm
Steve: Fair enough - There could be many reasons to start Social Security early based on lifestyle or other needs. I just think it’s important to understand the math, and the likelihood that you’re foregoing quite a bit of cash benefit over a lifetime.
Mark
March 15th, 2008 at 2:19 pm
Most of what I read is crap. In the first place, if someone waites until 65 or 66 that person will probably be dead within 20 years…particularly if a male. If he or she lives past 85 or 86, they had better have family to take them in or else they will end up in a nursing home…in which case…whatever you have in SS will go to the nursing owner…not you.
Therefore, if you take your benefits at 62 or 63, you will get less but you will get more because you will receive benefits long than if you wait until 65 or 66.
Longevity cannot be predicted but insurance companies as well as the government know full well, that the average American is usually dead, or in a nursing home by 87 or so.
So spend what you’ve earned as soon as you can because–regardless of what you will ever have–Medicare and Medicaid will have to kick in because no one can afford “Assisted Living” or a “Private Nursing Home.” Therefore, unless you can afford the beforementioned, you will get the same care no matter how much SS you will have.
The Government does not want to pay benefits any earlier than it has to so it promotes the logic that you need longer deferral for SS than is necessary.
Also, many Americans can and do work under the table well into their 70s, so additioanl monies can and are made to offset the loss at 62 or 63 Retirement Age.
Figure it out for yourselves!
March 19th, 2008 at 1:50 pm
“The benefit is forever reduced, so the longer you or your spouse lives, the more you lose,” says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries.
Uh, please ask Ron to take a look at:
http://www.retireearlyhomepage.com/SS_delay_70.html
Why you shouldn’t wait until age 70 to collect
Social Security — maximizing your SS benefit
using a Withdrawal of Application (SSA-521)
April 4th, 2008 at 4:05 pm
If you start taking SS benefits at 62, you will receive reduced benefits, but it will take 15+ years to make up the difference between taking benefits at 62 or 65 or 66. Will I still be living then? Will I still be able to live a full life by then?
I agree with taking SS benefits early and investing the $, if you don’t need them. But, with everything going up in our economy, I think most of us will need every penny.
April 13th, 2008 at 2:21 pm
Senile shopper says: “If you start taking SS benefits at 62, you will receive reduced benefits, but it will take 15+ years to make up the difference between taking benefits at 62 or 65 or 66.”
In one sense, this is true, although the present value of lifetime benefits is the same for the average person regardless of when they claim benefits (as long as it’s before 70). The actuarial adjustments are very close to neutral, even when you account for interest on the foregone benefits.
But in another sense, you don’t have to wait 15 years to get higher benefits, you get them as soon you start collecting simply because you monthly benefits are higher. Put another way, when you claim benefits isn’t simply a gamble designed to maximize what you get over your lifetime. It’s also a choice designed to give you the right amount of benefits to live on. Even if retiring at 62 maximized the PV of your lifetime benefits, if it left you with an income below the poverty line — as it would for many people — it’s probably not such a smart thing to do.
May 12th, 2008 at 5:28 am
I want early benefits.
I must to plan to get my benefits from salary and another work.