Want to make sure you get the most out of social security in retirement? How about getting an extra $150,000? Throughout history, social support programs have existed in one form or another. From medieval times where the feudal system was the basis of “social” security to guilds, fraternal orders, and England’s “poor laws,” nearly all civilized societies have attempted to care for those in need of economic security. The U.S. social security system as it exists today was created by the Social Security Act of 1935 under Franklin Roosevelt’s tenure. While minor alterations have been made over the years to benefit amounts, cost of living adjustments and other factors, the basis of social security system itself has remained relatively unchanged. Today, there are a number of ways for Americans to take advantage of social security benefits, but one easy strategy for maximizing retirement income is simply delaying the benefit start date.
Let’s assume Bob and Jane are 62 years old and ready to retire. Both spouses have held jobs and paid the maximum amount into social security for most of their working lives. Bob’s benefit at his full retirement age of 66 will be $2,000 per month, and so will Jane’s. They can begin to take benefits as early as age 62, but in exchange for an early draw, they will have to give up some of the benefit. The total payment at age 62 will be reduced by 30% of the full retirement age amount to $1,400 per month. Likewise, waiting past full retirement age will increase the benefit amount. From age 66 to age 70, the benefit amount will increase by as much as 8% each year plus inflation. So, by waiting until 70 to take benefits, Bob and Jane would each receive $2,640 per month instead of just $2,000 at age 66 and only $1,400 at age 62. That’s an additional $15,360 each year paid to Bob and Jane just for delaying their benefit start date from age 66 to 70 and an additional $14,400 per year by waiting from age 62 to age 66.
When looking at both Bob and Jane’s benefits combined, the gap becomes astonishingly higher. The following chart illustrates the differences in benefits paid to Bob and Jane jointly if they both lived to age 88.
When looking at the combined benefits of both spouses, Bob and Jane would receive an additional $196,800 if they began benefits at 66 versus 62 and lived to age 88. They would receive an additional $296,640 combined if they began benefits at age 70 versus age 62 and lived to 88. The longer they live, the greater the benefit of delaying the start date. The “breakeven points” between starting earlier vs. later are where the lines cross in the charts above. For example, the green line (beginning benefits at age 66) crosses the red line (beginning benefits at age 62) at age 74. So Bob or Jane would have to live past age 74 for delaying benefits from 62 to 66 to provide a higher value. They would have to live past age 77 (where the purple line crosses the red line) in order for a delayed start date from 62 to 70 to payoff for them in the long run. However, each year past the breakeven point is additional money in their pocket simply from delaying the benefit start date.
Of course, delaying social security is easier said than done in some cases. When social security is delayed, the income gap in the early years has to be made up by withdrawals from retirement and investment accounts, other sources of income, or working longer. An individual’s current health and family health history should also be taken into account. For some with a shorter than average life expectancy, delaying benefits may not be the best course of action. However, when a strategy to delay benefits is feasible and appropriate given an individual’s circumstances, the added benefit over a lifetime can be astonishing. And in an age of constantly rising medical expenses and costs of living, every extra bit of income in retirement can go a long way.
Delaying social security is just one of many strategies available to retirees to increase lifetime income through the social security benefits. There are a number of other planning strategies available to those nearing or in retirement, so it is important to know your options when it comes to social security retirement benefits. If you’re thinking of taking benefits early, you may want to think twice. Exploring all options and withdrawal strategies first can add hundreds of thousands of dollars in your pocket during retirement.
John Eubanks
