Delay Claiming Social Security to Maximize Financial Benefit

Bernie Benyak, CPA, CFP®, NSSA® Tax Director,

  Filed under: News and Tax Blog, Retirement Planning

“When should I apply for Social Security benefits?” is one of the most common questions baby boomers ask as they approach age 62, the age they become eligible to apply for early Social Security benefits. The answer is, “It depends.” Should you apply at age 62 and receive a reduced monthly benefit for a longer period of time? Should you wait until age 66, or even 70, and receive an increased monthly benefit for a shorter period of time?

The Social Security claiming decision is one of the most important financial decisions you will make in your lifetime. There are many variables to consider including health, life expectancy, current accumulated savings, anticipated inflation rates and lifestyle choices. Moreover, the monthly benefit amount is determined when a retiree begins claiming social security; the sooner you claim, the less you receive on a monthly basis.

On the flip side, there is a significant benefit to delay claiming as a retiree’s monthly benefit increases eight percent per year, until age 70. A chart posted by the Social Security Administration illustrates the positive month-by-month financial impact waiting has on a retiree’s benefit amount. However, no one can state with 100% accuracy that delaying the start of benefits until age 70 is the perfect choice. If a retiree holds off on claiming benefits until age 70 and then passes away at age 69, the retiree would have missed out on seven years of monthly benefit checks. If the retiree had claimed early benefits at age 62 then lived to age 95, he may have cost himself a tidy sum by receiving a reduced monthly benefit over 33 years of retirement.        

 

What Happens if I Apply Early?

Under current law, baby boomers born between 1943 and 1954 are considered to be at full retirement age when they reach 66. A person who applies at age 62 will receive approximately 48 more checks than someone who waits until their full retirement age. Since the early filers will receive 48 extra monthly checks, actuaries prorate their benefit amount so that people who live to average life expectancy will receive the same dollar amount. The reduction in benefits caused by this early claiming decision is called the actuarial reduction. Under current law, actuarial reduction is set at 25%. 

For example, Joe was born on October 1, 1954 and decides to claim his Social Security benefits on his 62nd birthday. Assuming he was entitled to a monthly benefit of $2,000 at age 66 (his full retirement age), Joe will receive a prorated monthly benefit of $1,500. This is the baseline amount that may be increased annually to account for inflation. 

 

What Happens if I Apply After Retirement Age?

On the flip side of the early claiming decision, some retirees wait to apply for benefits until after attaining full retirement age. Those who reach full retirement age and continue to delay claiming their benefits will receive fewer checks than those who claim at full retirement age. To compensate for delaying the onset of their benefits, the retiree will receive delayed retirement credits. For baby boomers born between 1943 and 1954, this delayed credit equals 8% per year for each year benefits are delayed up to age 70. That equals a 32% return over a four-year time period. If you consider how difficult it is to get an 8% annual return on your investments in today’s financial world, you can see one of the possible compelling factors to delay the start of your Social Security benefits.

Let’s assume Joe decides to delay filing for his benefits until he reaches age 70, his decision to delay increases his monthly check to $2,640. Joe’s decision to wait eight years enhances his monthly retirement income by $1,140 ($2,640 at 70 vs. $1,500 at age 62).

It is important to keep in mind that Social Security benefits are reviewed each year to keep up with inflation through an annual cost of living adjustment. By delaying the claiming decision, the cost of living adjustment (COLA) will be computed on the larger benefit amount. In Joe’s case, instead of this inflation adjustment being added to the lower benefit amount of $1,500 (if he started claiming at 62), it will be added to the larger $2,640 benefit amount (if he started claiming at 70). The cost of living adjustments are assessed annually for the remainder of Joe’s retirement. If Joe is survived by his spouse, she will generally continue to receive Joe’s enhanced $2,640 monthly benefit, plus annual cost of living adjustments, until her death.

The financial reasons for delaying Social Security benefits can be compelling. Unless mitigating circumstances exist (e.g., poor health, short life expectancy, no spouse, high performing investment portfolios), most of us can benefit from receiving a higher monthly amount by waiting to claim benefits until age 70. Delaying benefits and drawing down other retirement income sources – or working longer – can position retirees to start collecting a larger monthly Social Security benefit and to receive better cost of living increases each subsequent year.  

Interestingly, recent studies show a pronounced decline in claiming early benefits. Even so, more than a third of all workers claim Social Security benefits at age 62, which may not be in a baby boomer’s best interest with longer life expectancies and in the case of marginally funded retirement savings. Some would say that with recent advances in health care and emphasis on making healthy lifestyle choices, it is not unreasonable for boomers to outlive the average life expectancy and realize more financial benefit by waiting until age 70 to apply for Social Security. 

 

What is Right for Me?

Uncertainty around the Social Security system as a whole, or fear of passing away prematurely, may drive retirees to claim benefits early. All of us have the right to file when we become eligible, but carefully calculating the options is highly recommended. Instead of being driven by the fear of the unknown, we may need to consider our health and life expectancy, finances, inflation rates and desired lifestyle to help us make a prudent choice.  

The difference between a hurried claiming decision and a more thoughtful claiming decision could amount to hundreds of thousands of dollars over a lifetime. At Stockman Kast Ryan + Co., we invest in continuous education and specialized training in Social Security nuances. To further guide clients through the complex claiming decision, we also equip our tax advisors with the latest Social Security planning technology. We look forward to assisting when you are ready to plan this significant retirement step.

Bernie Benyak, CPA, CFP®, NSSA® Tax Director
Bernie has been in public accounting since 1995. His specialties include working with small business owners and relatively high net worth clientele. Learn more about Bernie here.