Social Security: Timing Matters

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A few weeks ago Chris recommended that I read a new book, “Social Security Strategies”, to better understand some of the strategies that clients can use to get the most out of Social Security over their lifetimes. As the name implies, the authors lay out different strategies on when to begin Social Security benefits based on profiles of an individual or married couple.
For many retired Americans, Social Security represents their largest source of income and the importance of the system is only growing. A 2010 Gallop poll found that retirees are relying more heavily on Social Security than previous generations and that benefits replace about 40% of the average retiree’s income.
Unfortunately, 74% of Americans start taking Social Security benefits the year they first become eligible. This approach might work for some, but for most this is not the strategy that will maximize their lifetime benefits. Due to this sub-optimal timing, BILLIONS of dollars of lifetime benefits are left on the table each year. The rules and calculations surrounding Social Security benefits are some of the most complex and confusing aspects of financial planning, which may be why many make the mistake of filing earlier than they should and risk losing hundreds of thousands of dollars of lifetime benefits. There are thousands of combinations and permutations that may fit an individual’s needs, but only one will accomplish maximizing your long term benefits while also minimizing longevity risk (the risk that you may live longer than expected).
There are two key lessons that serve as a general guide for when to start claiming your Social Security benefits. The first lesson is aimed at single individuals, whereas the second lesson applies to married couples.

  1. Generally, a single person who expects to live beyond age 80 should delay benefits until reaching age 70. Conversely, if that person expects to die prior to age 80, then taking benefits early would be the optimal choice.
  2. If one spouse expects to live longer than age 80, the couple’s lifetime benefits will generally be highest if the higher earner delays benefits until reaching age 70.

Although these are some useful tips, they are by no means exhaustive. The decision on when to begin benefits is one of the most important decisions of a retired person’s life. It would be wise to consult a financial advisor about when the right time to begin benefits would be.