Thursday, May 2, 2013

Inadequate Retirement Account (IRA): Claiming Social Security

Note: This is the fifth installment of a series of posts with advice for the 90%-plus American households that haven’t been able to save enough for retirement. The first post was Inadequate Retirement Account (IRA).

If you have lots of money saved for retirement, then my advice to you for claiming Social Security benefits would be pretty straightforward — delay claiming your benefits until you are 70 if you are single or are married and have a larger benefit than your spouse, and delay claiming until your full retirement age if you have a smaller benefit than your spouse. But, this is a series of posts for people who haven’t saved enough for retirement and that’s more complicated.

If you had lots saved for retirement, you could retire and live off your savings while you waited for your Social Security benefits to grow about 8% for every year you postponed claiming. That’s a deal that’s too good to pass up if you can get it.

Without huge savings, postponing claiming benefits probably requires working longer and, as I explained in my post Inadequate Retirement Account (IRA): Working Longer, that decision isn’t always up to you. Half of recent retirees report that they were forced to retire earlier than they had planned by unforeseen layoffs, closings, health problems or a need to care for family members.

With inadequate retirement savings, chances are very good that you will need to claim your benefits long before you turn 70, but I still recommend that you postpone as long as you can hold out.

I know that many people believe they should collect Social Security benefits at the earliest age (62), but that isn’t a wise decision for healthy people. Usually the basis for this belief is that Social Security benefits might be taken away at any time so you need to grab them while you can, but those arguments aren’t convincing. 

Conservatives have been trying unsuccessfully to kill the program since it was created in 1935. When George W. Bush tried to privatize part of it in 2005, in his words, “I did more than touch the third rail. I hugged it.” There is no political will to end the program and even proposed changes have always considered grandfathering for current participants.

The second argument for claiming early is that the break-even age is around 80. If you don’t live that long, you will receive less money by claiming later. I've heard many people say, "Heck, I probably won't live to 80, so I should take the money now."

I have no idea how those people know when they're going to die.

On the other hand, if you claim early and live longer than about age 80, you will receive far less in benefits. Since healthy people have no idea how long they will live, the best approach is to take the worst-case scenario (one or both spouses living a very long time) off the table by claiming as late as possible.

If claiming your benefits at the earliest possible age whether you absolutely need them or not will help you to sleep at night, go for it. But be forewarned that it isn’t the best bet from a financial risk-reward perspective. Many elderly widows will tell you that having their husband claim benefits at the earliest age possible was the worst financial mistake of their life.

T. Rowe Price has an online calculator that lets you play with a few different scenarios to find the best age to claim benefits for you (and your spouse, if married). I used it to calculate cumulative lifetime benefits for a married couple of the same age. The husband expects $2,300 a month in benefits at full retirement age and the wife expects $1,940 in monthly benefits at full retirement age.

If both spouses claim at the earliest age (62), and the husband lives to age 83 and the wife to 95, their cumulative lifetime benefits total $1,050,000.

If both spouses claim at the latest age (70), and the husband lives to age 83 and the wife to 95, their cumulative lifetime benefits total 28% more, or $1,346,000. 

The wife’s survivors benefit would increase from $20,700 per year if benefits are claimed at age 62 to $36,450 per year if claimed at age 70 — a whopping 76% more!
(Now you see why those widows are complaining.)

Postponing Social Security benefits as long as possible is a very powerful way to maximize your retirement income, and one of the few available ways if you have limited retirement savings.

Of course, maximizing Social Security benefits can be far more complicated than this example, and more complex than the T. Rowe Price website tool can handle. For example, the optimizers told me that my wife should claim and suspend benefits at age 66 and I should simultaneously claim spousal benefits. Two years later, my wife should claim her own benefit. Two years after that, I should file for my own benefit. As you can see, optimizing benefits can be very complicated. You’ll probably need help.

The company that provides the E$Planner software I mentioned in previous posts in this series also provides a package entitled Maximize My Social Security. While the T. Rowe Price tool is free, Maximize My Social Security currently costs $40. An alternative is to work with a financial planner, but that will likely cost more than the software. Reuters describes a number of other sources of help in this article, including AARP’s free tool.

My recommendations for claiming Social Security, which apply equally to those who have saved enough for retirement and those who have not, are first to not claim benefits at age 62 if you can live without them. And second, use one of the tools mentioned above or contact a financial planner to make sure you will get the maximum benefits to which you are entitled.

That leaves us one topic, investing, to conclude this series of posts on retiring with inadequate retirement savings.


  1. I think this is one of the cases where paying a fee-only(*) financial planner would be well, well worth the cost. You only get one (or two) chances to make the best choice.

    (*) Fee only because even for this seemingly conflict-of-interest-free situation, I know for certain there are advisers out there who would advise taking SS at age 62 and investing it in the annuity or whatever other product the adviser is selling.

  2. As a fee-only financial planner, I'm having great difficulty finding fault with your suggestion.

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