Dear Liz: Having read your advice on Social Security numerous times, I’m having a heck of a time encouraging a friend who reached full retirement age last year to start collecting her benefits. She said her Social Security isn’t enough to live on and she needs to work two more years before collecting. She said if she waits to apply that it would increase her Social Security by $400 a month. I’ve informed her that she can both collect and continue to work without penalty because she has reached full retirement age. She also would still get an annual increase based on her earnings, in addition to the annual cost-of-living increase. She won’t let me know how much her Social Security would be now, and I haven’t asked, but I’ve told her this is extra money she could invest.
Answer: Are you sure you were reading this column?
Copious research shows that most people are better off waiting as long as possible to file for Social Security. Given life expectancies at 65, most who make it that far will live beyond the break-even age where the larger checks they’ll get will more than offset the smaller ones they pass up.
Waiting is particularly important for the higher earner in a couple, since that determines what the survivor gets to live on. Waiting is also important for single people, since they don’t have a partner’s income to help. Single women have an especially high risk of finishing their days in poverty, which means maximizing their Social Security is usually the right call.
Besides, there’s no risk-free investment that would guarantee her an 8% annual return. That’s what she’s getting by waiting to start her Social Security benefit (at least until age 70, when the benefit maxes out). She might be able to generate similar returns with stock market investments, but she also could lose her shirt.
Something else to consider: Benefits are based on our 35 highest-earning years. If she’s making more now than she did in one of those previous years, she could be boosting her benefit even more by continuing to work. People who took time off to raise families or who had a history of low wages or part-time work often see a bigger benefit by continuing to work as well as waiting to apply.
I agree with your advice to delay taking Social Security, but the case is not nearly as strong as you suggest because you have left out a very important part of the pension calculation: Your earnings history is corrected for inflation before the 35 highest-earning years are selected. (The correction is a bit more nuanced than that, but that simple description is quite close.)
Women are more likely to have taken time off, worked part time or worked in low wage jobs. The inflation adjustments often aren’t as helpful as working a few more years so those low or zero earning years are replaced with a higher earning year.
“Besides, there’s no risk-free investment that would guarantee her an 8% annual return. ”
Don’t confuse “return” with “cash flow.” The cash flow may increase 8% per year, but at the expense of less years! Actuarily, the “today” number versus the “tomorrow” number are virtually identical. Waiting does offer an advantage because of today’s ultra-low interest rates, but it is not a guaranteed 8% annual return.
Thinking of it as a guaranteed return is helpful in context described: when someone believes it’s better to start early and invest it instead. Typically, they’re not thinking of the risks they would need to take to match what they would get by waiting. In terms of cash flow, most people will live beyond the breakeven age where the larger checks more than offset the smaller ones they pass up.
I agree also UNTIL the last paragraph where you stated:
“Something else to consider: Benefits are based on our 35 highest-earning years. If she’s making more now than she did in one of those previous years, she could be boosting her benefit even more by continuing to work”…
She stated her friend reached FRA – Full Retirement Age – last year so Social Security benefits are based on an Average indexed monthly earnings . AIME evaluates 35 years representing an individual’s top earnings, up to age 60, so SSA does not use any of the wages she is currently receiving. But they surely ARE taking the taxes out.
That’s not quite how it works. SSA uses 35 years of earning history and applies the average wage index, which is like an inflation adjustment, on earnings up to age 60. But earnings AFTER age 60 still can be used for the 35 years of earnings history to calculate benefits. This is why it can be so helpful for people with zero or low-earning years to work a few more years after age 70. Those earnings can fill a “gap” year or replace a lower-earning year.