Smart Move: Claiming Social Security Benefits Later Rather Than Earlier

As a result of the recession, social security retirement and disability benefit claims have risen 50% more than expected. Bloomberg reports that the 150,000 extra retirees claiming benefits may add to the financial pressure on the entitlement program and that expenses would exceed revenue beginning in 2016, with the social security fund running out of money in 2037, four years earlier than their previous forecast.

People have always used early Social Security benefits as a safety net during recessions. This could be because they have been unemployed for an extended period of time or don’t want to go to back to school to train for a new career. They may also be facing heaving debt burdens that make them dip into their benefits earlier than planned.

But many thinking of claiming social security should carefully consider this choice, because the longer term costs could easily outweigh the short term benefits. According to the NY times, studies have shown that delaying your claim to social security benefits can results in higher payments down the road, but the majority of people don’t follow that advice, choosing instead to start benefits early. Why wait to collect what is rightfully yours?

That logic may sound reasonable now. But in reality, the bigger risk is that you will live to a ripe old age. If you can wait, think of the money you aren’t receiving during that period as a payment of sorts for an annuity that will pay a higher, guaranteed stream of income later, if you live a long time (or at least longer than your savings last), financial experts say. You can claim Social Security any time from age 62 to 70, but the longer you wait, the larger your monthly check. And many people come out way ahead if they wait at least until their full retirement age, which is different from the day you stop working for good. For people born 1943 to 1954, full retirement age is 66, and it creeps up for younger people.

What do you stand to lose by taking benefits early? Take those who are set to receive $1,000 a month at their full retirement age. If they sign up for benefits at age 62, they will collect only $750. But if they wait until 70, they will earn extra credit and receive up to $1,320 a month — nearly a third more! For people who choose to defer benefits until age 66, it generally takes about 12 more years to collect as much as if you started getting checks at 62. So you break even, so to speak, about age 78, according to Avram Sacks, a Social Security law analyst for CCH, a tax and accounting information service. “If you are in good health, and you expect to live to 78 or longer, then the advantage goes to the person who waits,” he says. “But that’s assuming we’re all prophets and we know what’s going to happen tomorrow, and we don’t all know.”

Based on the evidence above, it seems that everyone should wait until they are 70. But that is not the case. The answer depends on many factors, including when you stop working, how much you have in savings, whether you are healthy, whether you are married or single and whether your spouse earns more — or less.

For Singles, the optimum time to collect is when they reach full retirement age (70)social security benefits chart calculator. This obviously does not apply to people who are already in poor health and probably won’t live past 78, give or take a couple of years. People who are still working should also defer.

Consider a single person with $200,000 in retirement savings returning 5 percent a year, as illustrated in the graphic. Instead of taking Social Security at age 62, he withdraws $19,000 annually until he turns 66. His savings will last until age 94, but he will still have $21,000 a year in Social Security benefits. If he claimed at 62, his savings would run out at age 87 and he would be left with only $16,000 a year in Social Security. So for people with significant savings who expect to live well into their 80s, it may make sense to wait longer.

When to take social security benefits for married couples is more complex because there are age differences, varying retirement dates and earnings and other factors to consider. In many cases, the higher-earning spouse should delay his or her benefits until age 70, while the lower earner begins to collect at age 62. This ensures that the surviving spouse will end up with the maximum amount of benefits for the rest of his or her life. Even if the higher earner died before age 70, the survivor’s benefits would be bumped up to what the deceased spouse would have gotten. But if the couple can afford it, should the lower earner wait until full retirement age? “It doesn’t matter because the goal is to get the most money for the person who lives the longest,” Ms. Brey, a financial planner, said.

To get a more precise idea about how to maximize your benefits, go to the Social Security’s retirement estimator, which uses your actual earnings record in its calculation. Also, if you are unsure of which direction to take, you should definitely see a financial planner who can help guide you through this complicated process. Either way, determining when to take social security benefits is a key aspect for those nearing retirement or planning for the future.


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