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 Ben Storey, Director, Retirement & Personal Wealth Solutions, Merrill Lynch, to get the latest thinking on what's important to consider as you make your decision.
Merrill Lynch: Ben, we're all living longer. Does that change how and when we claim Social Security benefits?
Ben Storey: 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 still quite low 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?
BS: 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.
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ML: Should women think of Social Security benefits differently?
BS: 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: How does being married affect the decision to claim benefits? What's the rule of thumb for couples?
BS: 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 reduced benefit at 62 and then request a spousal adjustment once his wife claims Social Security.
ML: And what are the rules for divorced couples?
BS: If you don't remarry and you are 62 years of age or older, you can file for spousal benefits whether or not your ex has filed. To qualify, your ex must be entitled to benefits and the benefit you would receive on your own work record must be less than what you'd receive based on your ex's record. There's a Social Security Administration web page that explains these requirements in more detail.
ML: Some of the rules regarding the way couples can claim Social Security changed in November 2015. What do people need to know about that?
BS: That's right. As part of the Bipartisan Budget Act of 2015, two claiming strategies that many married retirees found useful in boosting their retirement income were 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 collected income from the other spouse's benefit.
Under the new rules, with some exceptions, a person can only apply for a spousal benefit if his or her spouse has also filed for benefits. People can no longer file and then suspend their benefits, allowing them to grow, while their spouses collect on their record. And if you were born after January 1, 1954, you can no longer "claim twice"—or file for spousal benefits at Full Retirement Age while allowing your own future retirement benefit to grow.
ML: What’s your best advice for couples who can no longer take advantage of the two phased out strategies?
BS: The lower earning spouse can still consider claiming Social Security at age 62, and then request a spousal adjustment once the other spouse files for Social Security. That only works to your advantage if the spousal benefit is higher than your own retirement benefit at full retirement age. If both spouses have similar earnings, the higher earner could wait to claim benefits at age 70, while the lower earner claims as soon as he or she reaches full retirement age. In some situations, after the lower earner files, the higher earner could collect a spousal benefit and wait to claim his or her own retirement benefit at age 70.
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?
BS: 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 ways I can make the money work for me?
- What role should my Social Security benefit play in covering my living expenses in retirement?
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1Source: 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.