Friday, July 28, 2017

A popular expression goes “good things come to those who wait.” Undoubtedly, whoever coined that phrase did not have Social Security benefits in mind, but the saying certainly applies very well to them. As opined below, most people are better off deferring their Social Security retirement date until at least age 66, and probably to age 70.

Full retirement age under Social Security for people born between 1943 and 1954 is age 66. Benefits can be started as early as age 62 with a reduction (25% for those whose full retirement age is 66), or may be delayed as late as age 70 with an actuarial increase (8% per year after full retirement age). Thus, for example, an individual with a primary insurance amount (i.e., unreduced benefit) of $1,000 per month, can collect $750 per month at age 62, $1,000 per month at age 66, or $1,320 per month at age 70. The percentage increase in benefit by waiting from age 62 to age 70 is 76%.

Statistics from the Social Security Administration for the latest available year (2012) indicate that a majority of new Social Security awards occur before full retirement age. Specifically, nearly 40% of retired workers in 2012 commenced receiving their Social Security benefits at age 62, another 25% between 63 and 65, 31% at age 66 (i.e., full retirement age), and only 4% after FRA. The percentage who waited until age 70 to receive their benefits was less than 2%.

Thus, nearly two-thirds of new Social Security recipients begin collecting their benefit before full retirement age. Is it possible that so many people making similar decisions are mistaken? In a word, yes! Most (not all—see below for exceptions) people are better off deferring their receipt of Social Security until age 70, or close to that age, and could lose up to tens (or even hundreds) or thousands of dollars over their joint lifetime with their spouse by starting benefits too soon.

There are several reasons to postpone commencement of your Social Security benefits:

1. Longer Life Expectancies—Many people look at the “breakeven age,” which is the age at which total cumulative benefits received since retirement at a later age overtake the cumulative benefits received at an earlier retirement age. Thus, for example, if you start collecting $1,000 per month at age 66, your total benefits will “catch up” to what you would have received by collecting $750 per month beginning at age 62, by age 79. Therefore, you can argue that people who die before age 79 are better off starting their benefits early, and those who live to age 80 or later are better off starting benefits later. There is nothing wrong with this reasoning. But most people underestimate today’s life expectancies—men now in their mid-60s are expected to live until the mid-80’s, and women a few years longer. And life expectancies continue to expand, thereby making it likely that most people will survive beyond the breakeven age.

2. The Spouse Counts Also—In most marriages, the husband has the larger earnings history, and gets a bigger Social Security benefit. His benefit will be paid not only for his lifetime, but for his spouse’s lifetime also, if she outlives him. For example, if Yaakov is getting $2,000 per month and his wife Leah gets $1,100, in most circumstances Leah’s benefit will pop up to $2,000 after Yaakov dies. If Yaakov is now 67 and Leah 64, and Yaakov lives to age 85 and Leah until 90, then his benefit will be payable for another 26 years (Leah’s lifetime) instead of 18 years (his lifetime). This significantly changes the breakeven calculation, and makes it much more valuable to defer retirement and get a higher benefit.

3. Don’t Forget Inflation—Social Security benefits are indexed, and increase each year with inflation. Factoring this into the equation also increases the value of deferring benefits, because inflation increases are more valuable when they apply to a higher benefit. Furthermore, inflation makes the value of benefits payable in later years’ worth more than that which applies in earlier years, further strengthening the argument for waiting to retire.

4. Today’s Low Interest Rates—In a very low interest rate environment, a retiree cannot earn much on his savings unless he invests it in equities, bonds, or other risky investments. Therefore, why not use up some of your savings, which aren’t earning much anyway, and increase your annual benefit by 6-8% per year through deferral?

5. The Insurance Aspect of Social Security—As the name suggests, Social Security was adopted as a form of longevity insurance, to protect people from outliving their assets. This is the opposite of life insurance, which protects families of wage earners from untimely death. Dying early and not getting the most you could have from Social Security is unfortunate, but no worse financially than living a long lifetime and not getting a life insurance policy payoff. Much more important is protecting yourself from a long lifetime, and making sure you have adequate income if you live into the 90s or beyond.

I believe that these arguments make a compelling case for most people to wait until at least their upper 60s to commence Social Security benefits. In fact, there are only three cases where one might want to retire earlier—(i) if you and/or your spouse are in poor health, or have a family history of premature death; (ii) if you have limited savings or other sources of income, and need your Social Security benefit to live on; or (iii) if both you and your spouse have a significant earnings history, and the best way to maximize your joint lifetime benefits is by coordinating them which, in many cases, requires one spouse to retire early and one late (for example, if both you and your spouse are past full retirement age, and neither is receiving a benefit yet, you are definitely making a mistake).

So, when the time comes for you and your spouse to consider retirement, remember the saying “the early bird may get the worm, but the second mouse gets the cheese.” Social Security is more comparable to the mouse. Don’t fall into the trap by rushing. Instead, take your time, and you are more likely to be rewarded with greater income and security through your golden years.

Michael Karlin is a Fellow of the Society of Actuaries and an Enrolled Actuary, with over 35 years of experience as a pension consultant to large organizations. He now assists individuals in maximizing their pension and social security lifetime payouts. Mr. Karlin can be reached by phone at 201-836-6408 or 201-741-7774, or by email

By Michael Karlin

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