The Social Security Conundrum

Did you know that delaying Social Security could increase your monthly benefits by as much as 32%? As the current policy stands, a person whose full retirement age (FRA) is 66 will see an 8% increase for every year that he or she delays receiving benefits up to age 70.

Sounds like a great deal. Where else can you generate an 8% guaranteed return?

But is it really such a great deal?

The answer is sometimes, but not always.

Think about it. The objective of the Social Security Administration is to keep the Trust Fund viable for as long as possible. One strategy is to have fewer people in the program, so to keep numbers down, government actuaries have concluded that dangling an 8% increase will motivate retirees to suspend filing. Ultimately, the question you must answer is: how do I know if waiting to file is the right decision?

Let’s run a simple example.

Dan Mags is 60 years old, retiring at 66, and has a life expectancy of 87. If he files for Social Security at FRA (66) he will generate a lifetime total of $472,072. If, on the other hand, Dan waits until age 70, he will generate a total of $529,600, an increase of $57,528.

Sounds pretty good, right?

Dan will no longer be working when he retires, but he must still pay his bills, including housing, food, and transportation. Therefore, if he does not file for Social Security at 66, he will likely have to withdraw the equivalent of those benefits from his investment portfolio. Waiting until 70 will theoretically cost Dan $71,274 –the amount he would have earned from age 66 to 69. Instead, if he “collects” his Social Security income and allow his savings to remain untouched until age 87, he will have accumulated over $184,000 based on a 5% rate of return. (Should Dan decide to gift those assets after 10 years, that gift would total $107,935.)

The Dan Mags example fails to account for a variety of filing strategies available to couples, or other considerations such as working in retirement or spousal survivor benefits. The point is that comparing total benefits based on filing at a particular age is too simplistic, and sometimes other approaches must be examined to ensure that benefits are optimized (In essence, the term “optimize” refers to the evaluation of number of complicated variables, such as “file and suspend” or “file restricted,” to gain the most Social Security income possible.)

Social Security is a very complicated topic, and unfortunately, many retirees who fail to do their homework can lose hundreds of thousands of dollars throughout retirement.

Consider the following example of an average 55-year-old couple. Based on their work history, if they file at their FRA of 67, they will be eligible to receive $978,520. The following chart is an income comparison based on this couple filing age ages, 62, 67 and 70:

Filing Age Cumulative Benefit
62 and 62 $736,847
67 and 67 (FRA ) $978,520
70 and 67 $1,016,180

As you can see, this couple would be penalized over $240,000 for filing for benefits at age 62 instead of 67. Note that age 62 has historically been the most popular age to file for benefits and very few Americans actually wait until age 70.

Social Security is a critical source of retirement income for the majority of Americans; therefore uncovering the filing strategy that makes sense for you, your spouse, and possibly your (minor) children may add $10,000 or more annually in disposable income.

This week’s Update barely scratches the surface of this incredibly important retirement topic. Unless you are willing to put in the time to study Social Security benefit options, I strongly recommend seeking the advice of a financial advisor prior to your 62nd birthday. It may definitely make a difference in your retirement lifestyle.