You may not be as smart as you think you are

Portrait Of Senior Couple In ParkMost people are better off delaying the start of their Social Security benefits as long as possible. That’s the consensus of the AARP, financial planners and researchers who have studied the thousands of different claiming options. In fact, the benefits of putting off Social Security have grown in recent years, thanks to low interest rates, gains in longevity and changes in the law since the 1990s.

Still, every time I pass along the advice that waiting is better, I hear from those who just refuse to believe it. They focus on breakeven points rather than longevity risk; they don’t factor in spousal or survivor benefits; they underestimate how much their benefit can grow with even a few years’ delay.

So when Financial Engines approached me with the results of a recent survey, I just nodded my head in recognition. Their poll found that most people nearing retirement are confident that they can make smart Social Security claiming decisions–but that most do poorly on a test that measures their understanding of basic Social Security claiming concepts. You can read more about it in my column this week for Bankrate, “Are you Social Security smart? Guess again.”

My best advice is that before you claim Social Security, use some of the software tools that are available to help you evaluate your options. The AARP has a good calculator here. If you want to play with the numbers and assumptions a bit more, has software that will really let you get your geek on; a one-year license is $40. You also can talk to a fee-only financial planner who is savvy about claiming strategies.

Here are two things you should know:

1. If you’re married (and that includes you same-sex couples, if you file in a state that legally recognizes your marriage), you have unique opportunities to maximize your lifetime benefits and protect your surviving spouse from poverty. The difference between the best claiming strategies and the worst can be $250,000. No, that’s not a typo.

2. Social Security is not going to disappear. The program is simply too popular and its problems, though real, are not insurmountable. Even if Congress does nothing, the system can still pay out 75% of the benefits promised just from the taxes it will collect. If Congress does do something, the changes almost certainly won’t affect near-retirees but will instead change benefits for younger taxpayers. Signing up for benefits as soon as you’re eligible in order to “lock in” your checks will just lock you in to a much lower payment, for life.

If you’re one of those people who likes to dive into the academic research surrounding claiming strategies, here are a few articles to check out:

“Recent Changes in the Gains from Delaying Social Security.” This article in the Journal of Financial Planning demonstrates how changes in interest rates, longevity and the benefit formula have dramatically improved the benefits from delaying Social Security claims.

How the Social Security Claiming Decision Affects Portfolio Longevity.” Researchers William Meyer and William Reichenstein have done a lot of research on Social Security claiming strategies, and in this Journal of Financial Planning article they use a sophisticated model that factors in taxes to weigh how delaying Social Security can help retirees make their savings last longer.

Should You Buy an Annuity from Social Security?” This brief from Boston College’s Center for Retirement Research explains why it often makes sense to tap retirement savings so that you can delay the start of Social Security benefits.

When Should Married Men Claim Social Security?” This article, also from the Center for Retirement Research, should be required reading for any married couple thinking of starting benefits early. It does a great job of summarizing potential spousal and survivor benefits–and of making the point that starting too early can leave your surviving spouse in a world of hurt.

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  1. Chris Schene says

    Hi Liz,

    I have considered taking a year off you finish my masters degree which would put me in a lower tax bracket for that year and allow me to do a Roth IRA conversion as well in that lower “bracket” year.

    So my idea is: Take SS, take unemployment benefits (but still look for a job) until I start full time school and then once in full time school quit the job or go part-time. I would take SS + make up the income gap with funds from my Roth or regular IRA. My lower income would also make me eligible for educational help.

    Finishing my masters will qualify me to teach at the community colleges and in some University positions. Teaching a few community college engineering or math classes would be a great retirement job!

    What do you think?



    • Liz Weston says

      Depending on your age, it may make more sense to tap retirement funds and leave your SS benefit alone. This would be good to run past a fee-only financial planner. Garrett Planning Network has referrals.

  2. The link to the Bankrate article actually goes to the AARP calculator (which is quite good).

  3. Brian Canes says

    And neither might the advisors be as smart as they think they are.
    Firstly only a small percentage of people can afford to defer benefits.
    Secondly life expectancy is an *average* for a group of people, and has little meaning for individuals. As an average or median, about half of the people will die before their age group’s life expectancy, and half after. Suppose 20% (high) of people can afford to defer benefits to age 70. 10% will die before the crossover age. The other 10% (can’t tell which individuals) will live past their crossover age when it deferral pays more than not deferring – around 85 typically. And even then they are taking a gamble with their survival (you bet your life.)
    So giving blanket advice to the public “better off to defer” is wrong advice to 90% of the people. And mediocre advice to the other 10% who should take benefits at 66 (or before if not working) and invest the money in a portfolio that is say 60% risk free – can make say a 4% return. This will extend the crossover to say age 90 depending on inflation (not sensitive.) So you are taking less of a risk investing than deferring.

    • Liz Weston says

      Brian, I’d really encourage you to follow the links and read the research. Life expectancy is only one factor, and a smaller one than you might think, thanks to changes in the program, the interest rate environment and the many claiming strategies available (especially the ones for married couples). That’s why Christopher Jones, chief investment officer for Financial Engines, came to the opposite conclusion, which is that delaying is better for 90% of the people.

  4. I have no doubt that it is better to delay filing for Social Security as long as possible and I am resigned to holding off until full retirement age for the survivor benefits. Having been laid off at age 62 with no real possibility of finding similar work at similar pay, I have no choice but to use some of my retirement savings. I have no immediate concerns, but many people in similar situations have no retirement savings and have no real choice but to file for benefits.

  5. Brian Canes says

    “Delaying is better for 90% of the people” Assumes that 90% can afford to delay. This is simply not true. Without reading Mr. Jones. And during the period of delay people will die. And during the period of delay the lower benefit is foregone. And you can only do better if you outlive the crossover age to cover what has been forgone. So survival is a major factor.
    I will read his argument – would you have some links?

  6. Doc Chapman says

    I keep seeing the percentage grow on all these articles by waiting till latter years to draw SS
    My wife started drawing hers at 62 and it was stopped, In Aug of 2014 she will be nearly 66 and she will only draw 35.00 a month more not counting the 1.7 cola
    It is no where near any of the greater amounts that are mentioned in articles
    At age 70 it will only go up another 75.00 not anywhere near the 4-500 a month that a lot of people say
    I can’t speak for anyone else only here These numbers are even after her working till she was 64 1/2 y/0
    She started drawing at 62 they stopped it for over payment ,She was drawing 950
    she kept working till 64 1/2 and has decided to delay until she is nearly 66
    She got a statement that included the two extra years and she will get 985

    • Liz Weston says

      The benefit grows only if you put off taking it. By starting benefits at 62, your wife locked herself into a check that was substantially smaller than what it would have been if she’d delayed applying. The benefit grows by nearly 7% a year each year between 62 and full retirement age, and then 8% for every year past retirement age until age 70, when it maxes out. In addition, her checks were reduced by $1 for every $2 she made over a threshold amount. That “earnings test” goes away if you wait until full retirement age to apply.

  7. Brian Canes says

    Life Expectancy at any age is an average for the cohort. So in your example 65+19 is 84 so approximately half of the cohort aged 65 will die before 84 and half will die after 84. So the half that dies early will not do better by deferring. This is exactly supported in the SOA article you supplied “Life expectancy is calculated as a measure of broad population averages, not a predictor of a specific individual’s lifespan. Approximately half the population will live longer than their average life expectancy.” So, again, the advice to defer is not good for half of those who can afford defer.

    I did not see an article by Christopher Jones, just a quote. I should just take his word for it? I was expecting a scholarly article.


    • Liz Weston says

      Chris was in my article, and made the comment as an aside. He’s seen all the same research I have (some of which I linked to above). If you’re talking straight breakeven point (when claiming at 66 or 67 gets you more than at 62), that’s typically around age 78, well short of typical life expectancy.

  8. Brian Canes says

    But, however, moreover and nevertheless, it remains true that a substantial portion of those deferring will not make it to the crossover/breakeven point. Regardless of what those analysts espouse.
    To defer is not suitable advice for a substantial portion of the population.
    So again, why bet your life deferring. Rather take a downside protected bet on investing early. If, of course you can afford to defer at all.
    If you want to see the math I can provide.

    • Liz Weston says

      Yep, some people will die before the breakeven point. And some will live well beyond their life expectancy. The tough part is figuring out who. Starting early means having less, perhaps for a long, long time (which is why financial planners emphasize its role as longevity insurance). If you’re only making decisions for yourself, that’s one thing, but if you could leave behind a surviving spouse, putting off benefits could mean the difference between her squeaking by on an inadequate benefit versus having a comfortable life.