With the average savings account paying out a paltry 0.11% in interest and with 10 year US treasuries yielding 1.85%, Social Security offers a far better rate of return. Did you know that for every year that you defer claiming your Social Security, you can earn a Delayed Retirement Credit of 8% up until age 70?
That’s right, by doing nothing but waiting to collect, your Social Security monthly payment will increase 8% per year. And when you do collect, those increases will be received for the rest of your life, because Social Security is a lifetime program. By planning when and how to claim your Social Security benefits, you can plan to combine your claiming strategy with your spouse’s claiming strategy, or claim as an ex-spouse or as a survivor.
There are over 9,000 Social Security claiming options for the typical couple, figuring out which one is best for you is critical to helping ensure that you live a comfortable retirement.
Claiming Social Security Early Is Usually a Bad Idea
Unless you have a known medical condition which will significantly shorten your lifespan, claiming your Social Security early is almost always a bad idea. 62 is the earliest that one is able to claim a Social Security retirement benefit and because of the attractiveness of a monthly benefit deposit into their account and not knowing any better, claiming at 62 is still what many Americans do.
As seen on the chart below, claiming a retirement benefit at 62 will mean that you will permanently reduce the monthly benefit you receive by 25%. Furthermore, if you’re married or eligible to claim benefits as a survivor or as a divorced spouse, claiming early can also permanently wipe out other more lucrative Social Security strategies that you could have used later. So why are many Americans still claiming early? Well, unfortunately it’s often a result of failing to know better and failure to have a plan. Don’t be part of this group; it’s costly.
Take this example of a married couple, Steve and Judy, from last week. Both Steve and Judy are currently 62 and Steve has a Full Retirement Age of 66 ($2,625 per month) while Judy has a Full Retirement Age of 66 ($2,010 per month.) If they each claim now, a few months past their 62nd birthday, Steve would receive $2,023 per month and Judy would receive 1,549 per month.
However, in this case, it is going to be far more beneficial for them to implement a more intelligent Social Security strategy where at 67, Judy will file for benefits on her own record and receive $2,170 per month while Steve at 67 will file a Restricted Application for spousal benefits only and then file for benefits on his own record when he reaches 70.
By doing so, he’ll receive $1,005 (50% of Judy’s Full Retirement Age amount) for three years from 67 to 70 and at 70, because of the Delayed Retirement Credits that accumulate at 8% per year, he’ll receive $3,465 per month. In total, over their projected lifetimes, this strategy will add a whopping $225,700 to their Social Security benefits vs. claiming early.
If You Have Other Savings and Investments, Generally Tap Into Those First
Many clients wonder how their other savings such as 401ks, IRAs, etc. should be factored into their Social Security plan. Because it can be so valuable to wait and claim your Social Security benefits at a more optimal time, these other types of accounts and other savings vehicles you have are often a great way to bridge the gap to help provide you with the ability to defer claiming your Social Security. For most clients, this is a wise decision because unlike a 401k or an IRA, Social Security is a lifetime benefit and cannot be outlived.
You will also receive the 8% automatic annual increases where in a 401k or IRA your investment returns will fluctuate. As a result, it is that much more important to accumulate the Delayed Retirement Credits and to maximize your Social Security benefit because it’s going to be with you for the rest of your life. If you don’t have significant savings but do have equity in your home, in some cases using a reverse mortgage to help you delay taking your Social Security can also be a helpful tool.
The Bottom Line
Properly coordinating and timing benefits is critical for everyone who needs to claim Social Security because of the importance of pursuing strategies that maximize spousal benefits, increase delayed retirement credits, and avoid some of the pitfalls that are far too easy to make without the proper guidance and understanding.
Whether any of the strategies above are right for you requires careful analysis as each situation is different.
You can also learn more about these important Social Security changes by watching a video overview or signing-up for an upcoming webinar at http://socialsecurityadvisors.com/changes
Matthew Allen is the Co-Founder/CEO of Social Security Advisors and creator of the new course Maximizing Your Social Security produced in conjunction with Weiss Educational Services. Matthew has helped thousands of seniors maximize their Social Security benefits and avoid costly mistakes when filing. Matthew has been at the forefront of financial services for over a decade. In addition to co-founding Social Security Advisors, Matthew also founded The Universal Group of Companies, a private investment firm, in 2004. From 2000 to 2004, Matthew was a NYSE Market Maker with LaBranche & Co., a Fortune 500 New York Stock Exchange firm.