There are a lot of misconceptions about when to file for Social Security benefits.  Should you file as soon as possible, at 66 or wait until 70?  The truth is your answer is and should be unique to you.  What your neighbors or even your other family members are doing probably should not be considered in your decision.  My goal in this article isn’t to convince you to wait, but to help you see the potential value in waiting if you have the financial ability to do so in order to make the best decision possible for your family.

When does the average American file for Social Security Benefits?

Based on conversations I’ve had with retirees, many people either claim Social Security early due to the fear of Social Security’s perceived insolvency or claim as soon as they retire regardless of age because they need the money to support their lifestyle.

My observations appear to be accurate as the article “Trends in Social Security Claiming” from The Center for Retirement Research at Boston College describes.  They summarized the findings of the Social Security Administration’s claiming data this way:

According to Social Security’s Annual Statistical Supplement, 48 percent of women and 42 percent of men who claimed retired-worker benefits in 2013 were age 62, after excluding beneficiaries who switched from disability benefits to retired-worker benefits at age 66.  The next most popular claiming age was the Full Retirement Age (FRA), which was 65 until 2003 and gradually increased to 66 for workers turning 65 in 2008. 27 percent of women and 34 percent of men claimed benefits at the FRA. The other age groups individually account for a much smaller percentage of initial benefit awards.

This data means that three-quarters of all women and men filed at either age 62 or at their FRA.  This data is kind of interesting because age 62 and 66 are relatively arbitrary choices.  Knowing that only about 8% of people ages 63 and 64 respectively filed for benefits, my only conclusion is that people based their retirement on their initial eligibility for Social Security or upon reaching “Full Retirement Age” as Social Security defines it.

As for as the number of recipients that wait until age 70 to claim Social Security benefits: Just 4% of women and 2% of men wait that long according to the same research.  Given the potential benefits of waiting, this is a bit concerning to me.

I am sure that many people file when they do because they truly need the income and is therefore understandable.  But for many of the folks reading this article, it’s likely that you have a little more flexibility in your situation.  And it is your personal circumstances that will determine your options.

How the Numbers Work

As a retiree, you become eligible for Social Security benefits at age 62, but your benefit would be 25% lower than if you waited until your “Full Retirement Age”(FRA) which ranges between ages 66-67.  For those that are able and willing to wait until age 70, you could receive a benefit that is 32% higher than your FRA amount.  An example of the disparity between the three primary ages is below:

Using the Social Security retirement calculator on www.ssa.gov, for a recipient earning $95,000 per year, the benefit estimates would be:

• Benefit at age 62: $1,774 per month
• Benefit at age 66: $2,418 per month
• Benefit at age 70: $3,128 per month

The benefit of delaying from age 62 to age 70 could amount to an 82% increase in your monthly check.  And this is before the value of the Cost of Living Adjustments (COLAs).    Once you factor in the COLAs (of an assumed 2%) and an average Joint Life Expectancy of age 92, the financial benefits of waiting can become significant.

**Note: For purposes of this illustration, I used the expected Social Security payments at their respective ages without regard to the additional cost of living adjustments prior to filing in order to keep the calculation understandable and simpler.  In other words, if there were any interim COLAs between ages 62-70, the table above could be considered a conservative estimate due to the ommission of an additional benefit not being used in the calculation.

**Note: The numbers that are in bold font above are bold to assist you in finding them as I reference them below.

A few things from the above chart stand out to me:

• When completing this analysis, you can see that the break-even point is approximately age 79 if you wait until age 66 or age 82 if you wait until age 70.
• Additionally, at the Joint Life Expectancy age of 92 (more on this in a moment), the cumulative value of having waited until age 70, as opposed to filing at age 62 was approximately $180,551.
  • Assuming you or your spouse is still going strong at age 92, the check you would be receiving each month would be approximately $1,623 ($4,836-$3,213) larger than if you had filed at age 62.  That is an annual income difference of $19,476 at a time that you may need dependable income most.
• The difference in annual income provided by Social Security at age 70 vs filing at age 62 is $12,588 or $1,049 per month ($3,128 - $2,079)

To give you some perspective on the last number, it might be helpful to know how much you would hypothetically need in a portfolio to provide the $12,588 per year in additional income.  Based on an assumed withdrawal rate of 4%, it would require approximately $314,700 to recreate the additional income ($12,588/0.04) that Social Security could provide by having waited.  And Social Security can provide that income on a guaranteed basis and without any market risk.  It might be stating the obvious, but I run into very few retirees that wouldn’t love additional guaranteed income and less market risk.

Social Security as an Asset

There is a tremendous asset value associated with Social Security that is often overlooked.  Most people focus on the monthly paycheck that Social Security provides and breakeven point rather than what it would take to recreate that income from a portfolio.  All the while, as stated above, having a higher Social Security payout can have the secondary effect of reducing the market risk associated with the rest of your portfolio due to having a higher income as well as mitigate longevity and inflation risk.

According to an article written by Michael Kitces, titled “Valuing Social Security as a Retirement Income Asset“, he notes that Social Security has some very unique features that can make waiting even more attractive.

…when viewed from the balance sheet perspective, Social Security is not only a highly valuable asset overall, but one with very unique investment characteristics; unlike most other assets, its value rises in low-return environments, and is further enhanced by unexpected inflation.  In addition, Social Security’s asset value naturally rises the longer you live, effectively providing a self-renewing asset that cannot be outlived (unlike the other retirement assets on the personal balance sheet!).  In other words, one of the primary reasons to delay Social Security and spend other assets first is that the Social Security asset is the one best hedged to the risks that damage most retirements!

The tremendous value of what Social Security is providing in terms of inflation protection and a lifelong guaranteed income would be tough to overstate.  And these benefits are further magnified the longer you wait to collect.

The Value Waiting has on Survivor Benefits

It’s obvious based on the data above that the earlier you claim Social Security retirement benefits, the less you will receive but for a longer period of time.  The later you claim, the higher your benefit amount, but for a shorter period of time.  This observation is what often encourages people to focus on the breakeven point.  However, by focusing on that, you may inadvertently overlook the powerful survivor benefit as it relates to the primary breadwinner and what that can mean for the long-term financial security of your spouse.

If you’re married and the primary breadwinner, one part of the decision-making process that should be clearly understood is what benefits would continue if/when you should pass away.  In the case of the death of the primary breadwinner, the surviving spouse will receive the higher of the two Social Security benefits.  The lower of the two will go away.  For obvious reasons, the higher benefit is typically that of the primary breadwinner.

So, when running the breakeven calculation, you must realize that you should not be betting solely on your own life but on the life of you OR your spouse.  And, as I wrote in a previous article on longevity, statistically speaking there is a 50% chance that you or your spouse will still be alive (and therefore need income) at age 92 and a 25% chance of living to age 98.

Running a breakeven analysis using normal life expectancy, as it is commonly done, probably isn’t doing justice to the issue of longevity and accounting for the lives of both you and your spouse.  This is especially true given the statistical likelihood of you and/or your spouse living well into your 90s is greater than 50%.

The Value of Waiting on Cost of Living Adjustments (COLA)

Plainly stated, waiting to claim your benefits boosts the value of the COLAs.  With longevity risk comes inflation risk and all COLAs are not created equal.  The Cost of Living Adjustments that Social Security adjusts on an almost annual basis is done on a percentage basis.  The value of that percentage change will amount to more real dollars on larger Social Security payouts than smaller payouts.

For example, if you are receiving $1,774 per month ($21,288 per year), then a 2% COLA would be an increase of $426 for that year.  Whereas, if you are receiving $3,128 per month ($37,536 per year), then a 2% COLA would be an increase of $750 for that year.  In other words, the increase in real dollars would be 76% higher.  And this benefit compounds on each prior year’s benefit increases.  This will cause the annual income disparity between those that file early versus those that file late to grow over time.  Everyone is on an equal playing field in terms of the claiming options that Social Security provides since they offer the playbook to you in advance.  You just need to know how to take full advantage of all that they offer.

All that sounds well and good, but…

Do You Have Enough Resources to Last Eight Years?

Unless you are still working full-time, many folks who choose to delay will still need income in order to sustain their lifestyle which generally means they will need to make distributions from their portfolio.  Others have pensions that may be sufficient in addition to their portfolio.  It is critical to understand, however, that if you are planning to use your portfolio to bridge the gap you should consider placing a piece of your portfolio in more conservative investments.  Otherwise, you could be forced into liquidating assets at inopportune times or forcing yourself to file earlier than you’d like.  In any case, you should run the numbers on your situation before making a final decision whether to delay or claim earlier.

If you find that you do not have a sufficient portfolio to sustain your standard of living in order to delay, another option to consider is working a little longer if that’s a possibility to help improve your overall retirement situation.

Waiting Until 70 is Not for Everyone.

There are many factors to consider when deciding when to claim your Social Security benefits that can override any of the above points.

• Your expenses: If you are retired or are unable to work for whatever reason and your expenses are exceeding your income, your best option may be to file for Social Security benefits to improve your budget.
• Your survivor’s needs:  If your spouse would have a sufficient income to support him/herself in retirement or would not be eligible to receive your benefits, you may consider filing.
• You are single: If you are single, then you are effectively “betting” on just your life.  As a result, you are the only one that is subjected to the results of your decision, so you may have more flexibility in making this decision than others.
• Your other incomes:  If your other incomes such as pensions, annuities or various other incomes are sufficient to cover your needs, you may consider filing earlier than age 70 and investing those proceeds.  If your plan would be to invest the Social Security proceeds, it would materially alter the calculations above and may make filing early a very worthy consideration.
• You are not the primary breadwinner:  If you are the lower-earning spouse, it may make sense to file earlier to offset expenses while your spouse waits to file for their increased benefit.
• You are still working:  This might seem obvious, but if you are still working and accumulating Social Security credits that will impact your overall benefit amount, your decision may be altered based on the amount of money being earned, the impact on your Social Security benefits and your age.
• The size of your portfolio relative to your needed withdrawals:  It may make financial sense to draw down your portfolio in order to further delay filing for Social Security.  One of the main thoughts behind this idea is the on-going value of the increased guaranteed benefit that Social Security provides as well as the increased value of the cost of living adjustments that the higher payment would benefit from.
• Your health: If you are in poor health and your spouse would not require or be eligible to receive your benefits, it may make sense to file earlier.  On the contrary, if you are in great health, you may consider waiting as long as possible to file for your benefits.

Summary of Benefits to Waiting Until 70:

• Additional long-term income
• Hedges longevity risk
• Reduces inflation risk
• Larger survivor benefits
• Increase “real dollar” cost of living adjustments
• Can equate to less market risk in your portfolio
• More peace of mind

In retirement, there are very few areas that you can add additional leverage to offset potential retirement risks.  To help offset inflation risk in your portfolio, you can take on additional interest rate risk in your bond portfolio and/or market risk in your stock portfolio.  Neither of which can you control.  But to a large degree, you can control when you file for Social Security.  Given that waiting provides additional long-term income via a higher payout, plus additional inflation protection via COLAs, the value of waiting to file can have significant appeal when it comes to planning for a successful retirement.

There truly are countless ways to plan for this Social Security decision and it should account for your family life, health, survivor needs, and personal financial circumstances.  Given all the variables that go into this decision, if you have questions that I can help you answer, please feel free to send them my way at [email protected].

Anytime you are considering making Social Security decisions, you may want to review your Social Security statement.  The Social Security Administration mails paper statements annually to all eligible workers who are 60 years or older.  Or you can obtain your statement anytime by going to www.ssa.gov and creating an account.

Disclaimer: This material is being provided for information purposes only, should not be construed as a recommendation, and is not a complete description necessary for making an investment decision.  Opinions are those of Ashby Daniels and not necessarily those of Raymond James or RJFS.  The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.  Investing always involves risk.  No investment strategy can guarantee success.  Past performance is not indicative of future results.  There is no assurance that these trends will continue or that forecasts mentioned will occur.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Raymond James is not affiliated with and does not endorse the opinions or services of independent third parties named herein.  Links are being provided for information purposes only.  Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their reflective sponsors.  Raymond James is not responsible for the content of any website or the collection or use of information regarding any web site’s users and/or members.  Example(s) provided for illustration purposes only.