It may seem like common knowledge that delaying the claiming of Social Security retirement benefits is an excellent strategy for many families. The financial planning profession may understand this, but it is certainly not true for the general public.
The Social Security Administration’s Annual Statistical Supplement 2013 reveals that the most popular age to start retirement benefits is still 62, the earliest age one is eligible to receive retirement benefits. According to the SSA, 37.5 percent of men and 42.4 percent of women claimed at age 62. These numbers are down from approximately 50 percent ten years ago.
However, it does not appear that people are waiting until age 70 when benefits are maximized. The claiming rate at age 70 has remained fairly steady in the low single-digit percentage range. Rather, the decrease in early filing appears attributable to an increase in the number of people that wait until their full retirement age (FRA) with 31.5 percent of men and 25.2 percent of women waiting until then to claim.
The benefits of waiting are well documented. The longer you wait, the more you get per month. For someone who's FRA is 66, the benefit claimed at age 70 is a substantial 76 percent more than the benefit available at age 62, before any inflation adjustments.
In terms of an "investment return" Professor Wade Pfau estimates that the real – not nominal -- return for waiting is 3.2 percent by age 84, the average life expectancy of a retiring 62 year old male. At 86, the average life expectancy of a woman, the number jumps to 4 percent, real. By age 90, the real return for delaying Social Security is 5.2 percent. In any interest-rate environment, those are excellent results from something that is not affected by financial market risks.
The primary risk involved with delaying Social Security is longevity. Delaying and dying early can result in a substantial or total loss. However, people who expect longevity are wise to consider delaying. This is particularly true of couples.
It doesn't matter who dies first. The survivor of a married couple receives the larger retirement benefit of the respective spouses, making the lifespan bet one placed on a joint life expectancy. With the break-even age typically 81, the odds of a payoff from a delaying strategy are pretty good. One online estimator puts the odds that a male age 62 survives to age 82 at 55 percent. A woman's odds are 65 percent and the odds that either spouse will make it that long, is a substantial 84 percent.
Still, many people are claiming early. The most common cause is simply that people need the money. A significant percentage of the U.S. population gets by paycheck to paycheck. An infusion of cash from Social Security is hard to put off.
Another significant reason for early claims is simple ignorance. While we financial planners talk about claiming strategies often, many Americans don't know what they don't know or find Social Security system too complex to understand.
Many people are passing on delaying for better, even rational reasons. The benefits of delaying are only received if someone lives long enough past the break-even age. If one does not live that long, or lives for a very short period of time past that age, they don't get much of a payoff from delaying.
While one reason delaying strategies look so attractive is that many people believe actual life expectancies are longer than the tables Social Security uses, death is still a fact of life. Current health, family history and other factors can lead one to believe that living into their mid-80s or beyond is unlikely.
Another common negative reaction to the concept of delaying a claim for Social Security benefits stems from the belief that Social Security will not be around to pay later. This is not surprising, given how many people simply don't understand how Social Security works.
As members of the baby boom generation retire and become recipients of benefits, they and their employers also stop contributing payroll taxes to the system. The trust fund is used to make up the difference. When people hear the government estimates the trust fund would be empty by 2033, many assume this means no benefits will be payable.
The fact is that payroll taxes being collected at that time are estimated to be enough to pay around 75 percent of promised benefits. No doubt, a 25 percent across-the-board cut is serious. My FRA comes in 2034 so I can’t help but be concerned. Nonetheless, I think assuming zero Social Security benefits in the future is too cautious a position to take.
I would note that in a recent "Nerd's Eye View" blog post, advisor Michael Kitces recalculated the real return possible from delaying Social Security if benefits were cut 30 percent in the future. Naturally, the returns are not as terrific as they are as Pfau arrived at with no reductions, but the real returns were still better than other "safe" alternatives including TIPS.