Social Security benefits are a great source of financial support for most Americans as they enter retirement. I like to think of social security as one leg in a three-legged stool to support retirement including a company pension and savings in taxable and tax-deferred accounts. After years of contributions, it is heartening to see the benefits start to come in!
If you haven’t checked your Social Security benefits summary recently, you should register online and take a look at it. There is lots of talk about the newly designed “personalized” Social Security benefits materials. The new design highlights the benefits of delaying receiving payments personalized for you in an easy-to-understand graphical format! Following is a generic table highlighting this info (https://www.ssa.gov/pubs/EN-05-10147.pdf). As you can see, for each year you delay your benefits the benefit amount increases by about 8%.
So, how do you decide when to take the benefit? Most all academics in the financial planning field say that the economics of the claiming benefits strategy always favors delaying as long as possible to earn the extra 8% per year of benefit increase. This is based of large population samples and broad averages, so this is not the answer for everyone, especially if you don’t live a long life consistent with broad actuarial tables.
One way to help make the decision is to think about the “break even point”, the point in time that the cumulative benefits for a strategy surpass the as-soon-as-possible strategy. It helps to determine the age after which delaying benefits would lead to an increase in total lifetime benefits.
There are many financial calculators that can help calculate the break-even point and Dattilio & Ash uses the holistic approach employed by the MoneyGuidePro investment planning model. The benefit of this model is that it integrates the social security claiming strategy with your total financial profile including projected retirement expenses, income and invested assets to ultimately calculate an overall “probability of success,” the probability that you will have enough assets and income to get you to your end of plan.
Per the chart from MoneyGuidePro below, you can see all the potential social security claiming strategies for our fictional couple who are currently working. They both expect to claim close to the maximum amounts but need to think about when to start claiming within the context of their total financial situation.
As expected, the model shows that the maximum lifetime benefit tops out at scenario 5 at $2.083 million if they both delay claiming until they both reach age 70 (the age where increased benefits stop accruing). The MoneyGuidePro model also shows that integrating this strategy with their overall financial profile results in an 85% probability of success, a very good result. The Break Even Point is also heartening since this means that the couple only needs to live to ages 76 and 75, well below the current average life expectancy of about 80 years (depending upon how it is defined), whereby all benefit payments after that age are a net increase in lifetime benefits.
Also as expected, claiming as early as possible at age 62 in scenario 2 produced the worst lifetime benefit of $1.445 million and only a 53% probability of success for their plan, not a good result. If the couple didn’t want to wait until age 70 for whatever reason, waiting to full retirement age (FRA) at about age 67 in scenario 4 would give a reasonably good result of $1.890 million in lifetime benefits and a 76% probability of success, a good result.
So, there are decisions to be made based on both a quantitative and qualitative approach and there is no “right” answer for everyone. Arguably, if you don’t need the benefits to pay retirement living expenses and expect to live past the break even point, the answer to delay until age 70 is easy. But if you need the benefits to pay retirement expenses, calculating the Break Even Point, total lifetime benefit, and probability of success give you the numbers to evaluate within the context of your expected life expectancy and comfort with a calculated probability of success.