Dear Liz: Every time someone asks a question about when to start taking Social Security, all you financial advisers make your calculations based on the 7% to 8% annual increase you get by delaying between ages 62 and 70. What you never mention is that once you start getting Social Security, you also start getting the cost of living annual adjustments. I started at 63 and my monthly check has already gone up 5% and it’s compounded. In this era of higher inflation, that pushes out the break-even point into an age in the late eighties. You need to add that into your advice.
Answer: Surveys have shown that most people are happy with their decision to start Social Security, even when they started it early. Perhaps they don’t know what they’re missing.
The researchers who have studied Social Security claiming strategies have factored inflation into the mix, as well as longevity, investment returns and taxes (there’s something known as the “tax torpedo,” which can jack up marginal tax rates for middle-income Social Security recipients). The assumptions can differ, but the results don’t: The majority of people benefit from delaying. In today’s low-interest-rate environment, many researchers say the vast majority are better off.
Another factor the researchers consider — and that many early starters don’t — is what happens to the surviving spouse. When one member of a married couple dies, one of their two Social Security checks goes away and the survivor has to get by on a single check, which will be the larger of the two. That’s why it’s so important that the higher earner in a couple try to delay as long as possible, because it will boost the check for the person left behind.
That doesn’t mean single people should start early, however. Single people tend to have less savings and wealth than married people; they’re more likely to be poor than married couples, and single women have a higher poverty rate than single men. If you wind up getting most if not all your income from Social Security, you’ll want that check to be as large as possible.
As for your phrase, “this era of higher inflation” — yes, the 2.8% cost-of-living boost was higher than the 2% increase of the prior year. The year before that, the inflation adjustment was close to zero, and it was actually zero in 2010, 2011 and 2016. Annual adjustments over the last 20 years have averaged just a little over 2%. That’s not a lot to get excited about.
I understand the theory behind delaying initial Social Security claims as long as possible to take advantage of the 7%-8% annual increase in benefits between ages 62-70. But I’m sure you would agree that the Social Security system is unstainable in its current structure, given the torrent of baby boomers entering the system and the decreasing pool of workers funding it. How likely is it that those 7%-8% increases will continue to be available to those of us at (or beyond) the tail end of the baby boom?