Social security: The case against filing early
By Mark MillerThe oldest baby boomer turned 62 this month and promptly signed up for Social Security. But it probably wasn’t a very smart financial move.
Dozens of stories ran when Kathleen Casey-Kirschling - America’s oldest baby boomer - applied on January 1 to start receiving her monthly check. That’s what about half of all Americans do at 62. But for most, it’s a costly mistake that will mean foregoing thousands of dollars in lifetime benefits - in some cases, hundreds of thousands.
Here’s how it works:
You become eligible to claim benefits at age 62. But most Americans will receive larger lifetime payouts by waiting, if at all possible, until they reach age 66 - or even 70.
Health is the key, because the math here all depends on how long you live.
When you file early, the U.S. Social Security Administration (SSA) reduces your benefit to avoid paying higher lifetime benefits to you than it does to someone who waits until the so-called Normal Retirement Age (NRA). Under the rules, your lifetime benefits will be reduced for most of the years you start early, based on an actuarial projection of your longevity.
Currently, the NRA is age 66 for anyone born from 1943 to 1954, and it’s slightly higher for people born thereafter (for more detail, visit https://retirementrevised.com, where I’ve posted links to Social Security planning resources). Let’s say your NRA is 66, but you retired and started taking Social Security at 62. That means you retired four years early. The net effect: Your benefits will be reduced permanently by a total of 25 percent.
“The benefit is forever reduced, so the longer you or your spouse lives, the more you lose,” says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries.
If you can delay taking benefits beyond the NRA, the difference is even greater. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect: If you wait until you’re 70, your annual benefit will be 32 percent higher than it would be if you started at age 66 - and in addition to the 32 percent, you also get all the cost-of-living adjustments (COLA) from the intervening years.
You’ll come out ahead so long as you-or your spouse-live past what’s called the “break-even” age. That’s the age where the total benefits paid to the patient ones start exceeding total payouts to those who take early benefits. That age, Gebhardtsbauer says, is around 80-and in the case of more than 80 percent of American couples, the husband or wife will live past that age, he says.
How can those extra payouts add up to the hundreds of thousands of dollars I mentioned? It happens if you or your spouse lives many years beyond the breakeven age-and the numbers are compelling.
“Say you commence taking benefits at age 62 instead of 70,” says Gebhardtsbauer. “Your total lifetime benefits would be lower by $140,000 if you or your spouse lives to age 90. And if one of you lives to age 95, your loss would be $275,000.” (The calculations assume an average Social Security benefit of $1,000 per month.)
Take a deep breath-but believe it. Remember, Ron is an actuary and works with numbers for a living.
If you’re married, it’s most beneficial for the higher-earning spouse to delay taking Social Security benefits. Typically, that’s going to be men. The men tend to die at younger ages; when that happens, a woman’s Social Security benefit will be bumped up to the spouse’s higher benefit.
For older women, that can be an important increase, since it’s a time of life when overall income can decline sharply. Social Security is the sole source of income for 42 percent of single women over the age of 62, and older single women fall into poverty at a higher rate than most demographic groups in the country. The poverty rate for elderly single women is 23 percent, compared with just 5 percent for married retired people.
Says Gebhardtsbauer: “Waiting to take benefits isn’t just good for your wallet, it’s good for the country.”
For millions of Baby Boomers, retirement is an opportunity for reinvention, rather than taking it easy.
Mark Miller is helping write the playbook for the new career and personal pursuits of a generation. Mark blogs at www.retirementrevised.com; contact him with questions and comments at firstname.lastname@example.org.