Financial advisers often ask me how they can persuade their clients to delay collecting Social Security benefits. Although there is no one-size-fits-all answer, the right claiming strategy usually depends on a client's health, wealth and work status.
Assuming clients are reasonably healthy and relatively wealthy, urging them to wait until the full retirement age of 66, or later, to claim Social Security benefits is wise. Tell them the smart money waits.
Want proof? A new report by the Government Accountability Office outlines the benefits of delaying Social Security benefits and the challenges faced by those who claim benefits as early as possible, at 62.
“Those who delay claiming until their full retirement age tend to have greater income and wealth in retirement and rely less on Social Security than those who claim earlier,” the GAO report said.
Households that delay claiming Social Security retirement benefits until the breadwinner's full retirement age have higher median income and wealth in retirement than those that claim before full retirement age, according to the GAO report. “Our analysis shows that those who delayed claiming benefits until at least their full retirement age had a median income soon after claiming that was 45% higher than households who claimed before full retirement age,” the report said.
Many who claimed benefits early were forced to do so because they were unable to work when they got older, the report noted.
“Those who worked in physically demanding blue-collar jobs were 55% more likely to claim benefits prior to their full retirement age compared to those in all other occupations,” the GAO report said. Unemployed older workers were also likely to claim benefits as soon as possible.
The message about the value of delaying Social Security benefits is slowly gaining hold.
WHO CLAIMED EARLYThe share of workers born in 1946, with a full retirement age of 66, who claimed benefits in the first month after turning 62 was about 32% for men and 38% for women, the report said. That's down from the 43% of men and 49% of women born in 1935, for whom the full retirement age was 65, who claimed Social Security benefits as soon as they were eligible.
“At the same time, a relatively large share of men and women chose to claim at their full retirement age — a spike that has tracked with the phase-in of the increase in the full retirement age from 65 to 66,” the report said. “This pattern is noteworthy given that the age of eligibility for Medicare has remained at 65.”
The report also noted that while retiring before Medicare eligibility can be challenging, the Affordable Care Act provides new sources of affordable health care through private health insurance exchanges that have no pre-existing condition restrictions.
Delaying Social Security benefits until benefits are greater makes sense, particularly if someone plans to keep working beyond 62. A client who claims benefits early but continue to work will lose $1 in benefits for every $2 earned over $15,120 in 2014. The earnings restrictions disappear at 66.
Benefits lost to the earnings cap aren't gone forever, merely deferred. The Social Security Administration will recalculate your client's benefits once they reach full retirement age.
Still, it generally makes no sense for your client to collect Social Security benefits early if they plan to keep working because they'll also forfeit the opportunity to engage in some creative claiming strategies that can significantly boost their lifetime benefits.
That's why I call 66 “the magic age.”
If your client wants to exercise the “file and suspend” claiming strategy that allows them to trigger a spousal benefit for their mate while their own benefit earns delayed retirement credits worth 8% per year for every year they postpone collecting them beyond their full retirement age up to age 70, they must wait until 66 to do so.
Likewise, if they want to restrict their claim to spousal benefits, allowing them to collect half of their mate's full retirement benefit while allowing their own benefits to earn delayed retirement credits, they must wait until the magic age of 66 to first claim Social Security.
FEW RETIREES WAITBy waiting until age 70 to claim, benefits increase to 132% of one's full retirement age benefit amount. However, few retirees wait that long. Only 8% of men and 7% of women who were born in 1946 claimed their benefits at age 67 or later, the report said.
Still, for those healthy, wealthy and wise clients, delaying benefits up until age 70 can make a lot of sense.
“Increases in average number of years spent in retirement and the decline in defined benefit pensions that provide lifetime income only increase the importance of the Social Security claiming-age decision,” the GAO said. “While claiming early provides retirement income at an earlier age, the reduction in benefits may cause those retirees to regret the decision if they live a long time.”
(Questions about Social Security? Find the answers in my new ebook available at www.investmentnews.com/MBFebook for $19.95.)