Future retirees ponder Social Security strategies

Delayed claiming decisions will be based, in part, on interest rates

Mar 6, 2019 @ 11:22 am

By Mary Beth Franklin

I often get questions from people who were born in 1960 or later about whether it would make sense for them to delay claiming Social Security benefits beyond their full retirement age of 67. My usual answer is I don't know. Much of that decision will be tied to prevailing interest rates at that time.

Delaying Social Security benefits until age 70 has been a very valuable decision for many current retirees. They were able to accrue delayed retirement credits worth 8% per year for every year they postponed collecting their benefits beyond their full retirement age, up until age 70. Someone entitled to a full retirement age benefit of $2,000 a month at 66 could increase their benefit by 32% over four years, to $2,640 per month, if they waited until 70 to claim the benefit.

In reality, their future benefit would be even larger because all the intervening cost-of-living adjustments from the time they became eligible for Social Security at age 62 until they actually collected them would be added to their base benefit amount. And many married couples and eligible divorced spouses were able to claim benefits on their spouse's or ex-spouse's earnings record between ages 66 and 70 while their own retirement benefits continued to grow.

But the big reason that delaying Social Security benefits until age 70 proved to be such a smoking hot deal was the 8%-per-year delayed retirement credit far outperformed all other risk-free investments in the near-zero interest-rate environment that has existed over much of the past decade.

The Federal Reserve's targeted interest rate slid to a record low of 0.25% in December 2008 and remained near that level through 2015. Although the Fed began tightening monetary policy in 2016, real interest rates remain near zero, with the latest fed funds target of 2.25% to 2.5% about the same as the current rate of inflation.

But that was not always the case. Interest rates climbed to a record high of 20% in 1980. Three years later, the Bipartisan Commission on Social Security Reform recommended that delayed retirement credits, which had been 3% per year, gradually be increased to encourage Americans to wait to claim larger Social Security benefits in an era of increasing longevity.

The first year that the 8%-per-year delayed retirement credit took effect was 2009 — the same year the stock market hit its lowest point during the Great Recession. A volatile stock market and record low interest rates made the 8% per year credit appear even more attractive, particularly as many baby boomers decided to remain in the workforce after watching their 401(k) accounts plummet.

But will delaying Social Security benefits always make sense? Maybe not. Between 1971 and today, interest rates averaged 5.69%, according to Fed data. If rates reach that level again, it may make more sense to claim benefits at full retirement age, even if you don't need the money, and bank the benefits, rather than risk dying before claiming them.

In the meantime, future retirees ponder their future claiming strategies in an ongoing low-interest-rate environment.

"I was born in 1960, was the higher wage earner and I am waiting until 70 to max out my Social Security benefit," a reader from Florida wrote.

"My wife was born in 1962 and has her own Social Security benefit that is greater than the spousal amount. When should she begin taking her benefit?" he asked. "Should she wait until 70?"

"There are two reasons to delay claiming Social Security until 70: to maximize a retirement benefit and to provide the largest possible survivor benefit," I responded. "I generally think it makes sense for one spouse — particularly the one with the higher benefit — to delay claiming until 70. However, the other spouse may want to claim at full retirement age or earlier as a way to bring some money into the household while the other spouse delays. If nothing else, it will pay for your Medicare premiums."

Another reader asked if a 63-year-old husband could claim a spousal benefit from his 59- year-old wife and then switch to his own record at 66.

No, for several reasons. The wife is too young to claim Social Security and the husband can't restrict his claim to spousal benefits on his wife's earnings record because of claiming rule changes adopted in 2015.

Now only people who were born on or before Jan. 1, 1954, have to right to claim spousal benefits on a mate's (or ex-mate's) earnings record when they reach their full retirement age of 66. This younger couple will never be able to choose which benefit to claim. They will be paid the highest benefit to which they are entitled based on their age at the time they file for Social Security.


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