Do you ever wonder why so many people are talking about the value of delaying Social Security benefits?
It's pretty simple to understand the appeal of earning a guaranteed 8% per year for every year you postpone collecting Social Security beyond your full retirement age up to age 70.
If your full retirement age is 66, delaying Social Security until 70 translates into a 32% bump in retirement benefits, which will create a larger base amount for future annual cost-of-living adjustments.
If you were born in 1960 or later, your full retirement age is 67. Consequently, you can earn only three years of delayed retirement credits, boosting your benefits to 124% of your full retirement age amount.
But why does everyone seem to be talking about it now?
It's because the delayed retirement credits weren't always so rich. And the current 8%-per-year delayed retirement credit kicked in about the same time the stock market hit its lowest point in 2009. Interest rates on short-term savings vehicles fell and have been bumping around near record lows ever since.
First, a little history lesson.
As part of the sweeping Social Security Amendments of 1983, Congress decided to gradually increase the full retirement age from 65 and to increase the delayed retirement credits for those who delay collecting benefits beyond their full retirement age up to age 70.
Before that, a provision allowing for a 1% credit a year for delaying retirement past age 65, up to age 72, was first enacted as part of the 1972 amendments. It was increased to 3% a year in the 1977 amendments.
The 1983 amendments phased in an increase in the percentage, based on a person's date of birth, and lowered the age at which the increase no longer applied to age 70. Gradually, the annual delayed retirement credits were increased by half a percentage point every fewer years until it reached today's maximum limit of 8% per year.
The 8% delayed retirement credit applies to anyone born in 1943 or later, which also corresponds to the first birth cohort (1943-1954) whose full retirement age is 66. Consequently, the first time workers could begin racking up 8% per year in delayed retirement credits was in 2009, when those born in 1943 reached their full retirement age of 66.
The stock market hit its lowest point of the Great Recession in March 2009, and short-term interest rates on savings have been below 1% ever since.
So it's easy to understand why it was more common in the past for people to collect Social Security benefits as soon as they could at age 62, particularly if they had stopped working and had a pension. There was little incentive to delay collecting benefits. And even if they didn't need the money to replace earnings, they probably could save or invest their retirement benefits and earn some decent returns.
Then the Great Recession happened. Many older workers lost their jobs and Social Security became a safety net for many.
But for those who could hold on, working longer and postponing benefits became more attractive, particularly when they knew that every year they delayed collecting beyond their full retirement age of 66 would increase their benefits by 8% per year up until age 70 when the delayed retirement credits end. Where else could they find a risk-free, guaranteed rate of return of 8% per year?
That same situation persists today. The 8% per year delayed retirement credit is hard to beat. But of course, postponing benefits assumes you'll be around long enough to collect the higher monthly payments and offset all the years of smaller benefits that you forfeited.
Financial advisers can offer their clients a great service by educating them about their Social Security claiming options. But the true value of financial planning comes in working with clients to figure out how to replace their income during the years they choose to delay. Continued work? Short-term bridge annuity? Drawing down a 401(k) or IRA? There are lots of options. Creating a viable retirement income plan for today, and the future is where financial advisers can distinguish themselves from the competition.
(Questions about Social Security? Find the answers in my new e-book.)