EVEN FOR AMERICANS WHO HAVE INVESTED DILIGENTLY for retirement over the years, Social Security benefits matter. One of the first big decisions we're faced with as we approach retirement is when to claim our benefits—and timing is important. While you can start as early as age 62, waiting a few years or until you reach your full retirement age can substantially increase the amount you receive over your lifetime. (See "Find Your Full Retirement Age," below.)
We recently sat down with David Laster, head of Retirement Strategies at Bank of America Merrill Lynch, to get the latest thinking on what's important to consider as you make your decision.
Merrill Lynch: David, we're all living longer. Does that change how and when we claim Social Security benefits?
David Laster: Considering that one of the biggest retirement concerns people have is outliving their money, waiting to collect Social Security benefits begins to make a lot more sense than it might have in the past. Waiting to claim benefits can be a way of gaining a measure of protection against your risk of longevity.
As most people know, the longer you wait to begin taking benefits, the greater the monthly amount you receive. But that's especially significant in the event that you live a very long life. And because market interest rates are near historic lows today, letting the government keep your money longer could potentially provide a higher return than you could get from most fixed-income investments.
ML: Talk a little more about that. How might postponing your payments work to your benefit?
DL: Well, imagine that at age 66 you're entitled to an annual Social Security benefit of $10,000. If you wait a year to claim it, you'll forgo the $10,000 for the first year, but the following year, at age 67, you'll receive an annual benefit of $10,800, or 8% more—an amount, by the way, that is adjusted for inflation each year for the rest of your life.
ML: Should women think of Social Security benefits differently?
DL: Women typically live longer than men, and those extra years can make it especially important to find ways to boost income. Waiting longer to claim Social Security benefits is one strategy that can help do that. Take, for instance, a single woman who, instead of claiming benefits at 62, waits until 70—the maximum age for boosting benefits—before claiming. Waiting those extra eight years increases the amount she'll get in her lifetime by 18%, on average, according to research by Stanford economist John Shoven and Sita Slavov1, of George Mason University. For a high-income earner, this means about $70,000 of additional lifetime income.
ML: Does delaying benefits make as much sense for men?
DL: The best age for a single man to claim Social Security is actually 69, according to research conducted by Shoven and Slavov2. The average 62-year-old man will live to be almost 82. Based on that estimate, provided by the Social Security Administration, starting payments at age 69 should increase expected lifetime benefits by 14%, compared with what that man would receive if he started taking benefits at age 62.
"Letting the government keep your money longer could potentially provide a higher return than you could get from fixed-income investments."
ML: How does being married affect the decision to claim benefits? What's the rule of thumb for couples?
DL: It's important for couples to recognize the potential advantages of coordinating when they claim. If you are married, the monthly benefit you will receive – and, indeed, your ability to collect benefits – can in some cases depend on when your spouse claims benefits.
It often makes sense for the higher earner – let's say it's the wife – to wait until 66, or even 70, to claim benefits. Doing so increases her benefits throughout her lifetime and, should she die first, throughout the lifetime of her husband as well, since his survivor benefit would step up to that of his deceased wife. If the earnings gap between the husband and wife were substantial, he might think about claiming his own benefit at 62 and switching to a spousal benefit once his wife claims Social Security.
DL: That's right. In November, as part of the Bipartisan Budget Act of 2015, two claiming strategies that many married retirees have found useful are being phased out. One is the "file and suspend" strategy. The other is called a "restricted application"—or, more commonly, the "claim twice" strategy. Each of these strategies had the advantage of letting one partner's retirement benefit grow while the couple collects income from the other spouse's benefit.
The changes aren't immediate. Anyone who's already using the file and suspend strategy will be grandfathered in under the new law and won't be affected. Those who plan to use "file and suspend" have until April 29, 2016 to do so—you just have to be 66 by then. After that, this strategy goes away. The opportunity to file a restricted application will continue to be available to anyone who is 62 years old or older on or before Jan. 1, 2016. For more information on the changes, readers can take a look at this update on the new law.
I'd encourage anyone approaching retirement age to speak with their financial advisor about the new rules. When and how to begin claiming your Social Security benefits are important—and complex—decisions. And it can help to talk with someone who understands the latest rules, as well as your personal situation.
ML: Is waiting always the right answer?
DL: Waiting longer can increase the amount you receive over your lifetime, but what's right for you may be very different from what's right for me. You've got to consider your health and your family history—how long do people in your family tend to live, for instance? If your parents and grandparents didn't live past 75, it could make sense to claim your benefits as early as age 62.
Your other retirement assets should also be considered: Claiming your benefits earlier might allow you to delay drawing income from your portfolio and give it more time to grow. Also think about your goals and the kind of lifestyle you want in retirement, as well as your immediate financial needs. A family caregiving situation could arise that requires your attention and financial support.
If, after you've considered all the factors, you feel that claiming your benefits before age 70 makes sense for you, you shouldn't feel bad about not waiting. Social Security was conceived as a safety net. And it's only useful if you use it when you need it.
Use the guidelines below to see when you become eligible to claim full benefits.
If you were born between 1943 and 1954...
You can claim full benefits at age 66.
If you were born between 1955 and 1959...
Your full retirement age increases by two months for each additional year.
If you were born in 1960 or later...
You can claim full benefits at age 67.
Your benefits will continue to increase every year you delay benefits past your full retirement age, until you reach 70.
For more information, visit the Social Security Administration website.
3 Questions To Ask Your Advisor
- Would working a few years longer increase my Social Security benefit?
- If I begin claiming Social Security before I reach my full retirement age, what are some of the ways I can make the money work for me?
- What role should my Social Security benefit play in covering my living expenses in retirement?
1, 2 Source: John Shoven and Sita Slavov, “When Does it Pay to Delay Social Security? The Impact of Mortality, Interest Rates and Program Rules,” National Bureau of Economic Research Working Paper, July 2012.
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This material should be regarded as educational information on Social Security considerations and is not intended to provide specific social security advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.
Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.
Bank of America Merrill Lynch is a marketing name for the Retirement Services businesses of Bank of America Corporation ("BofA Corp."). Banking and fiduciary activities are performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., member FDIC. Brokerage services are performed by wholly owned brokerage affiliates of BofA Corp., including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLFP&S"), a registered broker-dealer and member SIPC.