It’s something of a truism that your should wait to begin taking your Social Security as long as you can up until age 70 because the longer you wait, the bigger your monthly check. This provides so-called “longevity insurance” because you’re more likely to need this extra income the longer you live since if you live to a ripe old age it’s more likely that you will run through your retirement savings.
A new study, “Which Households Benefit from Delayed Claiming?,” by Irena Dushi, Leora Friedberg, and Anthony Webb, published by the Michigan Retirement and Disability Research Center, concludes that this rule of thumb does not apply equally to all Social Security beneficiaries. This is in large part due to differentials in life expectancy between lower-income and higher-income beneficiaries.
Longevity in the United States is becoming increasingly unequal with higher-income Americans living as long as their counterparts in western Europe and the developed nations of Asia but lower-income Americans trailing citizens of other developed countries. This means that lower-income Americans are less likely than those with higher incomes to benefit from the higher Social Security benefits they would receive by delaying claiming. This is because the delay means foregoing benefits for up to eight years.
The Costs and Benefits of Delaying Social Security
An example can show how this works. Let’s assume that a worker would receive a Social Security benefit of $1,500 a month if they waited until their full retirement age to claim. (I’ll assume that is age 67, which is what it will be for anyone born in 1960 or later.) If they instead chose to begin receiving their Social Security at age 62, the earliest age at which they could do so, their benefit would be reduced by 30% to $1,050 a month. Over the five years between ages 62 and 67, they would receive $63,000.
The question is: If this beneficiary waited until age 67 to begin taking their benefit, how long would it take for the higher payout to make up for the $63,000 they would have foregone by delaying their Social Security? The answer (not taking into account inflation or any other factors) is 140 months ($63,000 / $450 = 140), or 11 years and eight months. In other words, this beneficiary would have to live until about age 79 to begin receiving more in Social Security than they would have if they had taken early retirement at age 62.
The crossover age is further out if we consider delaying taking benefits until age 70. Then, the beneficiary whose full retirement age benefit is $1,500, would receive $1,860 a month. They would have foregone $100,800 in payments to receive the higher monthly benefit. The crossover age to make up these funds in higher monthly Social Security would be a little over age 80. In other words, due to the increased incentive to delay benefits after full retirement age of an 8% increase in benefits for every year of delay, the crossover date is only extended about a year and a half for delaying from age 67 to 70.
How the Structure Benefits the More Affluent
All of this acts to undermine the progressivity of the Social Security system which pays lower-income workers a somewhat higher percentage of their lifetime earnings than it does higher-income workers. Those who can afford to wait until age 70 to take their Social Security are also those more likely to live beyond their early 80s and reap the benefit of their highly monthly payment. If the retiree who began taking benefits at age 67 in our example were to live to age 90, they would receive about $59,000 more in Social Security over their lifetime than if they began taking their benefits at age 62 (again not taking into account inflation or CPI increases in Social Security benefits). If they waited until age 70, by age 90 they would have received approximately $93,000 more than they would have if they had begun taking benefits at age 62.
So, whether you should take your Social Security at age 62 or wait until age 70 depends in large part on how long you think you will live. (Of course, there are other factors such as how much you need the funds and whether you’re continuing to work since there’s a reduction in benefits if you start receiving them before your full retirement age and you earn more than certain minimal levels of income.) But there are other factors, especially if you are married.
Husbands and Wives
While every married couple is different, men often have higher Social Security benefits than women because they often earn more and work outside the home for more quarters. This, of course, is changing over time, but it’s still more likely than not to be the case with baby boomer couples considering taking their Social Security now.
In addition, men are often older than their wives and men on average don’t live as long as women. This means that in a heterosexual married couple, there’s a good chance that the wife will outlive the husband by many years. It’s also likely that at least one member of a couple will live into their late 80s or beyond, even if their individual life expectancies are shorter, meaning that they will benefit from later Social Security claiming.
This plays into the structure of Social Security spousal benefits. When one member of a married couple dies, the surviving spouse receives the higher their two Social Security checks. This makes it all the more important for the husband in the typical couple to delay his Social Security until age 70 if possible.
Let’s assume for purposes of example that in a typical baby boomer couple the husband is two years older than the wife. Actuarially, his life expectancy is three years shorter. So the wife in this typical couple is likely to live five years longer than her husband. Let’s also assume that the husband’s full retirement age Social Security benefit is $2,000 a month and the wife’s is $1,000 a month. If the husband delays receiving his Social Security until age 70, he will receive $2,480 a month. Together, they will receive $3,480 a month, which will be reduced to $2,480 a month after one of them passes away.
If the husband dies at age 82, when his wife is 80 years old, and she dies at age 85, then the husband’s delay in taking his Social Security will mean that she receives almost $6,000 more a year during the five years she outlives her husband for a total of almost $30,000 (more if she lives longer, possibly into her 90s). Our example also demonstrates why there is no benefit for the wife to delay taking her Social Security benefit since at just about her crossover age where delaying her Social Security would be to her advantage, she will be switching over to her husband’s benefit in any case.
The University of Michigan study finds that delaying taking Social Security benefits married claimants more than single ones, but for different reasons depending on their income. Higher-income households benefit because the husbands are likely to live longer and receive more from Social Security themselves. In lower-income households the surviving spouse is more likely to benefit from the increased Social Security payment after her husband dies.
Of course, your results may differ based on age, health, and work experience. The program at MaximizeMySocialSecurity.com runs through dozens of scenarios to provide guidance on when it’s best to begin taking your benefits.