Make an informed decision about Social Security
Social Security is a significant source of retirement income for all households so before making any decisions, investors should understand their claiming options, breakeven ages and life expectancy probabilities.
Social Security timing tradeoffs
- Before making any Social Security claiming decisions, investors should consider their benefit options within the context of their overall retirement income plan.
- There are 3 significant claiming ages: the earliest claiming age is 62; claiming at Full Retirement Age (FRA) entitles an individual to 100% of his/her benefit and is determined by birth year; and if an individual waits to claim after his/her FRA up until age 70, he/she will be entitled to 8% delayed retirement credits per year.
- In 2017, full retirement age began transitioning from 66 to 67 by adding two months each year for six years - through 2021. Individuals turning 62 in 2018 will have an FRA of 66 and 4 months. Individuals whose year of birth is 1960 and will turn 62 in 2022 will have an FRA of 67.
- Filing early could permanently reduce benefits by 25-30%, depending on the individual’s FRA, but by waiting to age 70, an individual could receive 24-32% more than filing for benefits at FRA.
Maximizing Social Security benefits
- When deciding to claim Social Security between two filing ages, a common question is how long does it take to make waiting for the later claiming age pay off in terms of receiving more in cumulative benefits?
- This chart compares the break even ages for an individual who files at the key claiming ages. While this example illustrates benefit amounts for an individual filing with the highest average wage base, the breakeven ages are consistent for all claimants.
- The chart shows that this individual filing at age 62 in 2018 may receive $467,000 in total from Social Security by age 76. If this same individual waits until her FRA at age 66 and 4 months and receives a higher annual benefit she may receive more by age 76 for having waited. If the same individual waits until age 70 to file, she may receive more by age 80 than she would if claiming at FRA (about $700,000). This is called the breakeven age- the age one must live to in order to receive more in benefits for claiming later versus earlier.
- As the bottom chart indicates, there is a relatively high likelihood that a man, woman or one individual in a couple at age 62 may live to or beyond those break-even ages. Given the possibility of one spouse living until at least the break-even ages, spouses should carefully coordinate their benefits because a survivor receives the higher of the two benefits upon the passing of the first spouse.
Older individuals experience higher inflation
- When it comes to maximizing a Social Security benefit, timing is everything—but it depends on several factors. Many people believe they can maximize the benefit by filing as soon as possible—at age 62 for most—and investing the proceeds. Over the long term, their benefits could grow and outpace the amount they would have received had they waited and filed at Full Retirement Age (FRA) or later. This strategy may work for a few, but not for all.
- This chart illustrates that the right time to file for Social Security benefits depends on an individual’s longevity, shown at the bottom of the chart, and the expected rate of return of their overall retirement portfolio on the left hand side of the chart. Individuals who wish to maximize their benefit should consider their current health and general health habits, family history, and access to health care to determine how long they expect to live. In addition, the decision to file for a Social Security benefit should be considered within the greater context of an individual’s entire portfolio.
- Generally, the longer an individual expects to live and the lower the expected investment return, the more it pays to wait to take his/her benefit. For example, if an individual expects to receive a consistent return of 5% or less after fees, and expects to live to age 86 or longer, then he/she may consider waiting to age 70 to claim benefits (in blue shading), if financially able to do so.
- Two things to keep in mind when using this chart: an individual may live longer or shorter than expected, and the modeled investment returns are deterministic, so if a portfolio experiences more volatile returns or a down market early in retirement, this may greatly influence a claimant’s decision for when to file for Social Security.