Myth: Take the money and run - it doesn't pay to delay collection of Social Security
"I just turned 62 and am now eligible to collect my Social Security retirement benefit. Why wouldn't I take the money and run?"
- Overwhelming majority of Americans
Reviewing recent reports on Social Security collections, approximately 90% of people claim at or before Full Retirement Age, and the majority of those folks are collecting at 621. And possibly with good reason. For example, would I ever recommend someone go into credit card debt to purchase groceries all in the name of delaying collection of their Social Security? Of course not! However, if there are other assets you can tap to meet everyday living needs, it's at least worth considering what value you might be leaving on the table by collecting upon eligibility as opposed to waiting a few more years.
In this blog post, we attempt to quantify the benefits of delaying by reviewing a fairly common scenario: a household with two breadwinners approaching the Social Security decision. Let's set up our facts:
Steve - age 60
Primary Insurance Amount (PIA): $2,500 (remember - this is the amount Steve can collect at Full Retirement Age, which in his case is 66 years and 4 months)
Jen - age 60
Primary Insurance Amount (PIA): $1,900 (same Full Retirement Age as Steve)
Let's imagine that Steve and Jen both retire at 62 and conclude it's time to turn on their Social Security retirement benefit since they just turned off their employment income (a seemingly logical conclusion, right?). As reviewed in our blog post on the timing of Social Security collections, they both would have a 25% reduction applied to their PIA, resulting in estimated monthly payments of $1,833 for Steve and $1,393 for Jen. These payments would last as long as each of them lives; and if Steve were to predecease Jen, she would collect the higher of their two benefits, so her benefit would cease and she would begin collecting his monthly benefit in the form of Social Security survivor's benefits. By pursuing this strategy, by the time they reach age 85, they will have collected a potential cumulative benefit of $1.37 million.
But is there a more optimal strategy?
Yes, and it involves them both delaying until age 70; by delaying collection to this age, both Steve and Jen receive an increase to their PIAs of 29.3%, resulting in a monthly retirement benefit of $3,233 for Steve and $2,457 for Jen. Note that neither are receiving the full four years of 8% annual increases to their retirement benefit since their Full Retirement Ages are 66 years and 4 months; in other words; they'll only receive three years and eight months' worth of 8% annual increases.
Using the assumptions above, by the time Steve and Jen reach age 85, they will have collected a potential cumulative benefit of $1.79 million, approximately $412,000 more than their original strategy.
A few questions you might have:
1) What rate of return, if any, did you assume on the Social Security retirement benefit if it were taken at 62 and subsequently invested?
0%, primarily because I prefer to take the investment return burden off of at least one or two assets in a financial plan if I can. Social Security offers me the ability to do just that - with programmed increases of 5-6% between 62 and Full Retirement Age (66 or 67 for most people) and 8% annual increases from Full Retirement Age to 70, it's nice to have at least one part of a client's plan immune to the threat of a slow (no?) growth market that lasts for multiple years.
But to humor you, if we used a discount rate of 4%, the projected additional value of $412,000 is approximately cut in half. I look at Social Security as having a similar risk profile to that of a fixed income portfolio and in turn would use a rate of return in line with what I'd expect out of that asset class for the next couple of decades; 4% is probably a bit on the high side given where interest rates currently stand but, nevertheless, the point still stands that delaying is the optimal strategy for the couple in this scenario.
2) What if they don't live to age 85?
See our blog post regarding life expectancy for a detailed opinion on this matter.
3) What about a situation where there's only one breadwinner?
Let's say Steve's PIA is only $800 and Jen's is $2,500. In the case where they collect retirement benefits as soon as possible, age 62, Jen would collect a 25%-reduced monthly benefit of $1,833 while Steve would collect a spousal benefit off of Jen's record of $792 per month. By the time they reach age 85, the potential cumulative benefit of this strategy is $1.14 million.
However, what if both agreed to delay collection until age 70? Jen would receive an increase to her benefit of 29.3% to $3,233. As you recall from our blog post about spousal benefits, Steve wouldn't receive the 3 years and 8 months of 8% annual increases between Full Retirement Age and 70 because spousal benefits don't receive such increases; therefore, the monthly spousal benefit he collects at age 70 would be $1,250. A hidden gem here, though - Steve can collect off of his own earnings record once he reaches Full Retirement Age without any negative impact on his ability to collect a spousal benefit off of Jen's record at a later date. Why? Steve's not eligible to collect on Jen's record until Jen begins collecting on it herself; therefore, if Steve collects on his record at his Full Retirement Age, the Social Security Administration is going to give him the only benefit he's entitled to - his own benefit of $800 per month. Once Jen turns on her benefit, Steve will be switched over to collecting his spousal benefit based on Jen's record.
By pursuing a strategy where Steve collects $800 per month on his own record from Full Retirement Age to age 70 and then switches over to a spousal benefit of $1,250 at age 70 when Jen turns on her benefit of $3,233 per month, the potential cumulative lifetime benefit they collect by age 85 is $1.45 million, approximately $317,000 more than their original strategy.
I know, there's a lot here. The primary point you should take away from this article is that there is a strategy that works for you and your specific situation. The decision-making process needs to take into account all assets in your financial picture as opposed to looking at Social Security simply as a retirement income stream.
1 Munnell, Alicia H., and Angi Chen. “Trends in Social Security Claiming.” Center for Retirement Research at Boston College, 31 May 2015.