Private Advisory Group

Social Security: Shall I wait until 67 or 79 to claim mine?

Posted by Steve

Back in 1983 when the delayed retirement credits were raised from a mere 3% to a more comfortable 8%, the annual boost may not have seemed that significant. Treasury bills at that time were returning 9% and short-term bank CDs were paying as high as 9.5%, but in today’s world of scant yields on safe investments, an 8% increase for four years could be very hard to ignore.

Why delay?

This is an easy one and it reminds us of the old saying, “Patience is a virtue.” In this case, your patience will pay off as well. The longer you defer receiving social security benefits, the more you you’ll receive in delayed retirement credits. The current credits amount to an 8% increase each year, or a full 32% increase for those who wait four full years to start claiming social security at age 70.

Let’s do a quick comparison:

• Senior #1 starts claiming at 66 and qualifies for the maximum benefit. This senior receives a monthly benefit of $2,346 in 2010, an annual amount of $28,152.
• Senior #2 waits to start claiming at 70 and also qualifies for the maximum benefit. This senior will receive $3,096.75 each month or an annual benefit of $37,161.

Senior #2 enjoys approximately $9,000 more in benefits each year for the rest of his or her life. That’s a lot of money when we consider that life expectancies are rising steadily.

What’s the break even point?

If clients are unwilling to wait until age 70 for their benefits, we recommend reviewing the numbers to find your break even point. Our Senior #2 gave up $28,152 per year for four years, which means he or she starts out $112,608 behind. Calculating the 8%, it will take over 12 years to make up that shortfall, so our senior will have to live past the age of 78 in order to make the deferral worthwhile. Figuring the break even point requires understanding other factors that affect the calculation, such as marital status, investment growth rates, current inflation and personal tax rates.

• A married senior may or may not live to 90-plus, but there is a much greater chance that their younger spouse will. A surviving spouse will often receive the benefits of the first spouse to die, so delaying the start of benefits will commonly increase the surviving spouse’s income.
• Your investment growth rate will affect your break even point as well. The more money you could earn on early cash flow, the longer it takes for a late starter to catch up. Today, of course, short-term deposits yield virtually nothing and clients who delay their benefits may need to tap into money market funds or bank accounts for their spending.
• When the relevant price index goes up – also known as inflation – your benefits move up as well. If you receive an 8% delayed retirement credit while waiting a year to receive benefits, and there is a 3% cost-of-living adjustment, then your benefit will actually rise a full 11% instead.
• Personal tax rates are, of course, one of the magnifiers that point to delaying the claim of Social Security benefits as wise. Under current tax codes, delaying has tax advantages.

When should you defer?

If you put these concepts together, deferring the receipt of Social Security is a better choice if investment returns are low and inflation is relatively high. If tax rates rise in the future and the current laws remain, enlarged benefit checks will provide a more valuable tax shelter. Obviously, the time when deferring will be most important is when a senior lives beyond common life expectancy. A 96-year-old senior will appreciate receiving a $37,000 COLA annual benefit rather than a mere $28,000.

The bottom line is that the decision about whether and how long to defer your benefits goes beyond simple analysis you can do on your own. Some of the greatest risks to your retirement assets are longevity, poor investment performance (which is common these days), and inflation. Depending on what happens with the tax discussions going on in Congress currently, there may be higher taxes.

When do you want to be an early bird?

In some cases, seniors may find that being the early bird is best for their situation. For example, if a senior is in poor health and unmarried, it might be best to begin benefits as soon as possible. In some cases, clients choose to have their benefits start immediately in order to keep from depleting their other retirement savings, such as IRAs. This keeps their money in a tax-favorable account over a longer term. Many clients, especially the married couples, will find that the longer they live the better the deal.

As always, it’s entirely dependent upon your personal situation and we make our recommendations on a case-by-case basis to ensure that you have the information you need to make your decision. After all an 8% increase may be attractive, but it’s not a rule of thumb that applies to everyone.