As baby boomers approaching retirement in some form, we as a group of mostly still working adults are thinking more and more about Social Security retirement benefits and when we should claim them. I find myself studying and contemplating this issue more now than ever because of the hit Mrs. GoTo and I took in our retirement accounts. I am definitely counting on Social Security being there when we retire.
The second group suggests waiting to claim benefits until you reach what the Social Security Administration calls your “full retirement age.” For those baby boomers born between 1943 and 1959, the full retirement age falls between age 66 and 67. One of the primary reasons for waiting until the full retirement age is that a retiree cannot get on Medicare until age 65 anyway and for that reason alone may end up working until age 65.
The third group of Social Security claimants believe that a further delay until age 70 is the preferred strategy. This is the option that I want to consider in this post. I will be thinking and writing about the “age 62” and “full retirement age” options at another time.
In thinking about reasons to wait until age 70 to claim Social Security benefits, let’s start with the pure financial reason. For each year (after your full retirement age) that you delay claiming benefits, your monthly benefit will increase by 8%. (This assumes that you are born in 1943 or later.) For Mr. GoTo, that represents a difference in actual dollars of $788 ($3,102 at age 70 vs. $2,314 at age 66). Looking at it in terms of investment returns, by delaying for four years from age 66 to age 70, I receive a 34% return on my four-year “investment.” And that is a recurring and guaranteed return, year after year for at least as long as I live. It is hard to beat that kind of return. Granted, that is not a technically accurate calculation because I would have to factor in the payments that I did not receive during the four delay period as well as my life expectancy. But I think you see the picture.
Also, the increased benefit from the delay until age 70 is subject to further compounding from the annual cost of living adjustments that Social Security provides.
Another way of looking at the financial value of delaying until age 70 is to determine how much it would cost to purchase a single-premium annuity to give you the same increased benefit. In my case, the increased benefit is $788/month, adjusted for inflation. An inflation adjusted joint-life annuity (more about the “joint-life” part below) quoted from Vanguard that would provide that monthly payment would cost approximately $158,000 if purchased at age 66. If I take withdrawals from our retirement accounts equal to the 48 months of Social Security payments that I don’t claim between age 66 and age 70, that totals $111,072. (48 x $2,314). In other words, by delaying Social Security benefits for four years, I would be using $111,072 to do the equivalent investment work of $158,000. That’s a very good trade-off.
Taxation of Social Security benefits also has to be considered, as a function of any other income that you have. Basically, the taxation works like this:
If you file an individual tax return and your “combined income” is:
- between $25,000 and $34,000, you pay income tax on 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits will be taxable.
If you file file a joint return, and you and your spouse have a “combined income” that is:
- between $32,000 and $44,000, you have to pay income tax on 50 percent of your benefits.
- more than $44,000, up to 85 percent of your benefits will be taxable.
For purposes of taxation of Social Security benefits, your “combined income” is your adjusted gross income (from your tax return) + nontaxable interest + one-half of your Social Security benefits. This can get rather complicated. But the key is that you need to consider what your other income levels are during the time that you will be receiving benefits.
Finally, I need to think about perhaps the most important reason to consider delaying Social Security until age 70: the survivor benefit. Mrs. GoTo is four years younger than I am. Also, because she worked very little after our children were born, her Social Security benefit will be small in comparison to mine, approximately $1000 at full retirement age. Assuming that I die first, she would be entitled to claim a survivor’s benefit equal to 100% of my benefit (assuming she is at her full retirement age.) So you can see that the choice I make as to when to claim my benefits will dramatically affect my wife’s income after I die. The survivor benefit makes the Social Security retirement benefit similar to a joint-life annuity.
This is why it is so important to consider your spouse’s financial condition when assessing when to claim your own Social Security retirement benefit. Your decision can really help or hurt those that depend on you most.
If I end up delaying my benefits until age 70, we can consider having Mrs. GoTo claim her benefits at age 62, with me claiming a spousal benefit at that time (at age 66 for me). I could then switch to claiming my benefit at age 70. I will be thinking and writing more about that strategy later.
If this has you thinking and you want to experiment and analyze benefit estimates, pull out your annual Social Security Statement and study it. Or you can access the Social Security Online Benefit Estimator.
Photo Credits: Jeffrey Dulgar/TalkRadioNews and Wally Gobetz