Collect Now, or Later? Timing Your Social Security Benefits
by Tara Siegel Bernard
Tuesday, July 14, 2009
Collecting Social Security as soon as you are eligible is a tempting proposition — but experts agree you should try to resist if you can.
The majority of people don’t follow that advice, choosing instead to start benefits early. Why wait to collect what is rightfully yours?
That logic may sound reasonable now. But in reality, the bigger risk is that you will live to a ripe old age. You can claim Social Security any time from age 62 to 70, but the longer you wait, the larger your monthly check. And many people come out ahead if they wait at least until their full retirement age, which is different from the day you stop working for good. For people born 1943 to 1954, full retirement age is 66, and it creeps up for younger people.
What do you stand to lose by taking benefits early? Take those who are set to receive $1,000 a month at their full retirement age. If they sign up for benefits at age 62, they will collect only $750. But if they wait until 70, they will earn extra credit and receive up to $1,320 a month — nearly a third more.
At first glance, it seems that everyone should wait until they are 70. But that is not the case. The answer depends on many factors, including when you stop working, how much you have in savings, whether you are healthy, whether you are married or single and whether your spouse earns more — or less.
It may be impossible for some households to wait because the breadwinner has lost a job or is no longer able to work. And planners agree that it is smarter to collect earlier if it will prevent you from accumulating debt.
But if you can wait, think of the money you aren’t receiving during that period as a payment of sorts for an annuity that will pay a higher, guaranteed stream of income later, if you live a long time (or at least longer than your savings last), financial experts say.
“You can’t buy an inflation-adjusted annuity for anywhere near the cost of delaying Social Security,” said Henry Hebeler, a retired Boeing executive who created AnalyzeNow.com, a Web site that offers retirement advice and calculators.
For people who choose to defer benefits until age 66, it generally takes about 12 more years to collect as much as if you started getting checks at 62. So you break even, so to speak, about age 78, according to Avram Sacks, a Social Security law analyst for CCH, a tax and accounting information service. “If you are in good health, and you expect to live to 78 or longer, then the advantage goes to the person who waits,” he says. “But that’s assuming we’re all prophets and we know what’s going to happen tomorrow, and we don’t all know.”
And that is why financial advisers recommend planning for a long life. Here are some strategies to consider before signing up.
SINGLES Figuring out when to collect is easier when you do not have to worry about how your actions will affect a spouse. It usually pays to wait until your full retirement age if you can support yourself until then. (This obviously does not apply to people who are already in poor health and probably won’t live past 78, give or take a couple of years. People who are still working should also defer.)
Though many experts will tell you to delay as long as you can, waiting from 66 until 70 may not be optimal for some singles. “The reason is that they will have consumed too much of their savings in those extra four years to be able to offset the savings loss with higher Social Security payments within their lifetime,” said Mr. Hebeler, who has also written three books on retirement. “It’s surprising, but that’s what the analysis shows.”
Consider a single person with $200,000 in savings returning 5 percent a year. Instead of taking Social Security at age 62, she withdraws $19,000 annually until she turns 66. Her savings will last until age 94, but she will still have $21,000 a year in Social Security benefits. If she claimed at 62, her savings would run out at age 87 and she would be left with only $16,000 a year in Social Security.
For people with significant savings who expect to live well into their 80s, it may make sense to wait until 70, Mr. Hebeler added.
If you have already started receiving benefits, but wish you had waited, you are allowed to give it all back and start over. But this gets complicated. You will probably have to pay back more than what you actually received each month, since Medicare premiums and income taxes may have been deducted. Married people can do this, too, but some advisers caution against it.
MARRIED COUPLES Planning is more complex for married couples because there are age differences, varying retirement dates and earnings and other factors to consider. In many cases, the higher-earning spouse should delay his or her benefits until age 70, while the lower earner begins to collect at age 62. This ensures that the surviving spouse will end up with the maximum amount of benefits for the rest of his or her life. Even if the higher earner died before age 70, the survivor’s benefits would be bumped up to what the deceased spouse would have gotten, said Lesley J. Brey, a fee-only financial planner in Honolulu.
But once the higher earner hits full retirement age, there is a way for the lower earner to potentially get a bigger check by qualifying for spousal benefits. The higher earner can “file and suspend,” or file for benefits but immediately suspend them — it is perfectly legal and allows the lower-earning spouse to get up to half the higher earner’s benefits, while the higher earner’s benefits continue to accrue.
“This is the way to get the most out of the system without jeopardizing the longevity insurance aspect, which is the most important component,” Ms. Brey said. “You want the last survivor to have the highest possible payment. However, you get cash flow, which reduces the amount you have to withdraw from other sources and you don’t have to guess when anyone is going to die.”
But if the couple can afford it, should the lower earner wait until full retirement age? “It doesn’t matter because the goal is to get the most money for the person who lives the longest,” Ms. Brey said.
Married people with similar earnings may also consider another strategy. Here, one person claims spousal benefits at full retirement age and switches to his or her own, and presumably higher, benefits later, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.
To get a more precise idea about how to maximize your benefits, go to the Social Security’s retirement estimator, which uses your actual earnings record in its calculation. (Click on “create scenarios” to how retiring at different ages affects benefits). AnalyzeNow.com offers calculators that will help determine the best time for singles and couples to take Social Security.
If figuring it all out on your own proves too difficult, have a fee-only financial planner run the analysis for you. "It is worth it," Mr. Hebeler said, "to spend the money.
WHEN TO BEGIN TAKING SOCIAL SECURITY BENEFITS
When should I start drawing my Social Security benefits? I’m asked this question more often than any other by my clients who are retiring before Social Security’s normal retirement age. They all want to know if they should begin receiving benefits early with a smaller monthly amount, or wait for a larger monthly payment later they may not receive as long. In answering this question for yourself, you should take the following factors into consideration.
You could consider drawing Social Security benefits early if:
• The financial challenges facing Social Security in the future, which I discuss in more detail below, are well known. While it’s unlikely changes to benefits would be made to those who are already retired, it could happen—especially to those who have done a good job of preparing for retirement and have adequate retirement income from other sources. You may delay drawing benefits only to find out the amount you were expecting to receive has been changed. In the meantime, you’ll have been using your own savings to live on.
• Social Security is largely based on life expectancy. If your family health history suggests your retirement is likely to be shorter, then it may be wise to start drawing benefits when you can.
• Drawing Social Security early allows you to preserve you own savings longer. You’ll need income from somewhere if you’re retired at age 62. You can keep your own savings invested and growing longer by using your Social Security benefits to meet your living expenses.
You should consider drawing Social Security benefits later if:
• The first consideration you should take into account is whether you’ll be continuing to work and have earned income between age 62 and normal retirement age. Social Security benefits are penalized if you make over a certain amount of income. It wouldn’t be wise to draw reduced benefits only to have them penalized.
• The Social Security administration states if you live to the average life expectancy for your age, you’ll receive about the same amount in lifetime benefits no matter when you start drawing benefits. In general, then, if you come from a family with longer life expectancies, you should come out ahead by delaying your benefits until normal retirement age.
• Your spouse may be eligible for a benefit based on your work record. If you die before your spouse, he or she may be eligible for a survivor benefit based on your work record, particularly if you’ve earned more than your spouse over your lifetime. In this case, you may want to delay starting your benefits in order to provide your spouse with a higher amount.
Buyer’s Remorse on Your Benefits
No matter how much thought and research you put into when to begin drawing your Social Security benefits, there’s always the possibility you’ll have buyer’s remorse after you start. Believe it or not, the Social Security administration permits you to stop drawing your benefits and then restart them later at the higher current rate. But you probably won’t be surprised when I tell you there’s a bit of a catch: you must repay all of the benefits you’ve received to that point. However, you won’t owe any interest, and there will be no adjustment for inflation.
To accomplish this, you must file Social Security Form 521—Request for Withdrawal of Application. You can download the form at the Social Security website, www.ssa.gov. Social Security will calculate the amount you’ve been paid and request a check from you. Once you’ve paid back the benefits, you can apply again for benefits and start drawing at the higher rate.
If you’ve been paying tax on your benefits all those years, you may even be able to recover the taxes. You’ll need to pick up a copy of the IRS publication
915, which has instructions and worksheets that guide you through the process.
The reasons some people may want to stop and restart their benefits are pretty clear. If you started drawing benefits in your early 60s and are now getting a check for $1,000 per month, you may be able to stop that benefit and restart with $1,500 per month. A little math can help you determine how many years it’ll take to come out ahead. On the other hand, you obviously need to live long enough to come out ahead. If you were to die in an accident the month after you changed over, your heirs would be out all of the benefits you paid back.
I’d recommend you be in good health with a good family history of long life expectancies before I’d consider this strategy. The last point to consider is changes to the Social Security system may reduce your benefits in the future. It seems highly unlikely they’d change benefits for existing retirees but it’s a possibility. We all know Social Security is on shaky financial footing.
Recommendations for When to Begin Taking Social Security Benefits:
• You may want to consider drawing Social Security benefits early if you believe the financial challenges currently facing the system will adversely affect your benefits; you’re unsure about the length of your life expectancy; or you’d like to preserve your personal retirement savings.
• You could consider drawing Social Security benefits later if you’ll be continuing to work and have earned income between age 62 and normal retirement age; you come from a family with longer life expectancies; or you believe your spouse may outlive you and you want to provide him or her with a higher amount of your benefit.
• If you start taking your Social Security benefit and later wish you hadn’t, you can stop drawing your benefits and then restart them later at the higher current rate—but you must repay all of the benefits you’ve received to that point.
# # # #
Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and
President of Rodgers & Associates (www.rodgers-associates.com), “The
Retirement Specialists”, in Lancaster, PA. He is a 25 year industry veteran that specializes in helping people who are retired or about to retire make smart financial decisions.
Introduction To The Social Security Program
Below you will see a series of links to content regarding the Social Security system. What we have done is created the most comprehensive site on the internet where you can get all of the essential information you need regarding Social Security.
2009 Update To Social Security
A Snapshot of Social Security, SSI and Medicare
How You Earn Credits In The Social Security System
The Future of Social Security
Understanding The Benefits
What Every Woman Should Know
