How to maximize your Social Security benefits
Posted on 23 June 2010
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/how-to-maximize-your-social-security-benefits
This is the third of a four-part excerpt from my new book, The Hard Times Guide to Retirement Security (Bloomberg Press/John Wiley & Sons, June, 2010.
No matter what changes are made, it’s a sure bet Social Security isn’t going away anytime soon-and it’s 100 percent certain that the program will be one of your most important sources of security in retirement. But the amount you’ll receive over the course of your retirement isn’t assured or automatic.
Maximizing your Social Security benefits will require some good planning and decision making. The most important decision you’ll make is when to enroll. Dozens of news stories appeared in January 2007 when the country’s oldest baby boomer turned 62 and promptly signed up for Social Security.
But it probably wasn’t a very smart financial move. About half of all Americans do file at 62-the first year of eligibility for benefits. But for most people, it’s a costly mistake that will mean forgoing thousands of dollars in lifetime benefits-in some cases, hundreds of thousands.
Although you can file for benefits at 62, most Americans will receive larger lifetime payouts by waiting, if at all possible, until they reach age 66-or even 70. But it’s a bit of a gamble, because the math all depends on how long you live.
Remember that Social Security is a public insurance program. It’s built around actuarial principles-essentially, the mathematics of risk. And a central actuarial idea behind Social Security [amazon-product]1576603628[/amazon-product]is the NRA, a rule used by the Social Security Administration (SSA) not only to ensure the system pays out fairly among all beneficiaries but also to ensure that funding is adequate as the longevity of the average American increases.
Download a free chapter of The Hard Times Guide to Retirement Security: Managing health care expense
The NRA has been rising gradually over the years; currently, it is age 66 for anyone born from 1943 to 1954, and slightly older for people born thereafter.
If you file for benefits early-that is, before the typical NRA of 66-the
government reduces your benefit accordingly to avoid paying higher lifetime
benefits to you than it does to someone who waits until their NRA.
Under the rules, your lifetime benefits will be reduced based on an actuarial projection of your longevity. 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 annual benefits will be reduced permanently by a total of 25 percent.
On the other hand, SSA’s rules offer incentives for you to wait past your NRA. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect is that if you wait until age 70, your annual benefit will be 32 percent higher than it would be if you started at age 66-and you also get all the cost-of-living adjustments (COLAs) 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 those who are patient begin to exceed total payouts to those who take early benefits. That age is around 80-and in the case of more than 80 percent of American couples, the husband or wife will live past that age.
This can mean hundreds of thousands of dollars in additional lifetime benefits, assuming you or your spouse lives many years beyond the break-even age. An individual who takes benefits at age 62 instead of 70 would receive $140,000 less in total lifetime benefits if that person or his spouse lived to age 90. And if the man or woman lives to age 95, then the loss is even higher-about $275,000. (The calculations assume an average Social Security benefit of $1,000 per month.)
Next week: Launching your own business after age 50.
Reprinted with permission of John Wiley & Sons, Inc.
June 23rd, 2010 at 6:22 pm
The Baby Boom began in January 1946. So, the first boomers turned 62 in January 2008, not 2007.
June 24th, 2010 at 4:34 pm
If actuarially based, then taking benefits early should still average out the same over the life (your life) of the payouts.
I would think one would always come out ahead, regardless of when they start, if they live longer than the assumed average.
So it sounds as if the real benefit comes from a combination of delaying until after your “full” retirement age AND outliving the average. Is there a true “incentive” or does the actuarial adjustments just naturally work out this way because fewer people will make it to 70 than 62 and because half the people will by definition not make it to the average age regardless of when they start collecting benefits?
You are motivating me to rethink my plan for SS (which is to take it ASAP and then live to be 100).
Bruce
June 28th, 2010 at 8:20 am
You have to be actuarially challenged. Basing the decision on living to the age of 90 or 95 is ridiculous. The other approach if one can actually wait and is somewhat disciplined is to start collecting at age 62 and investing the money you collect between ages 62 and 66, even in a good 5-year CD, and you’ll be ahead of the game lomg-term. That, in fact, is what my wife is doing.
June 28th, 2010 at 8:24 am
This is all a gamble and like gambling, the house, in this case the government, will always wins. They have been stealing our SS funds since WW II and have no intention of paying it back. They have the final say. If push comes to shove they will just change the law. It’s as simple as that. They win, we lose.
June 28th, 2010 at 9:30 pm
Get your money as early as you can. The Feds are notorious for changing the rules behind your back. Money in hand is worth more than the promise of more money 4 years later. You could get hit by a bus and never see 66!!
July 1st, 2010 at 7:53 am
How to pay in additional social security for additional earnings when you reach retirement age,for a individual on your personal social security benifits.
July 9th, 2010 at 4:17 pm
FYI – Strategies mentioned in the article can be modeled now using the “Social Security Income Planner” web-site (URl- http://ssincomeplanner.com) for different Marital Scenarios. Thx
July 30th, 2010 at 5:14 pm
Take your money now. With the way this government is spending money and the way they are adding additional entitlement expenses, the whole economy is going to crash. They believe that they can print money with no reguard for inflation because the GDP will continue to rise at unbelieveable levels or they are planning on the crash, I can’t tell which.
August 4th, 2010 at 6:04 pm
There is absolutely no reason not to file for social security as soon as you are eligible (age 62). If you continue to work, your benefit will be deferred until you stop working and your benefits will be adjusted up by your additional earnings. If you work until age 66, the benefit you receive will be greater than the amount you would have earned if you did not file early, because your benefit is adjusted by the extra average annual income. If you decide to stop working, then your benefit kicks in immediately. There are absolutely no down sides, according to SocSec Pub# 05-10069. Anyone who tells you there is a reason to wait is deceiving you and doesn’t want you to collect your maximum benefit.