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There's arguably no social program more important for seniors than Social Security.
According to a recently updated study from the Urban Institute, an average earning male turning 65 in 2015 is expected to receive $294,000 in lifetime benefits from Social Security. With life expectancies on the rise, the importance of Social Security is only projected to grow in importance.
Unfortunately, the Social Security program isn't in the best of health. Based on the 2016 Trustees report, by 2020 the program will hit an inflection point and begin paying out more than it brings in each year. By the year 2034, as a result of the ongoing retirement of baby boomers and lengthening life expectancies, the Old-Age, Survivors, and Disability Insurance Trust will have completely exhausted its current $2.8 trillion in cash reserves. If this happens, the Trustees project that an across-the-board benefits cut of up to 21% may be needed to sustain Social Security through the year 2090.
This creates a bit of a dilemma for pre-retirees. Should they consider filing as soon as possible (age 62) to reap the rewards of the current benefit scale prior to a potential cut, or should pre-retirees wait to file and allow their benefits to grow by 8% per year until their full retirement age (age 66 or 67), or even age 70, the last year at which benefits accrue?
It's a tough question to answer given that personal factors will determine your best choice.
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Is the Social Security Administration failing seniors?
The most common solution for pre-retirees is to turn to the source, the Social Security Administration (SSA), for answers. However, according to recently released observations from the Government Accountability Office (GAO), the SSA could be providing seniors with information -- or a lack thereof -- that is costing them tens of thousands of dollars in foregone benefits.
According to the GAO's 51-page report, the SSA's website provides a very thorough rundown of the pros and cons of filing for benefits by a specific age. But the GAO noted that discrepancies arose in the dissemination of information during in-person enrollment at seven Social Security offices where a total of 30 face-to-face claims were made.
In particular, the GAO notes that in eight of 26 instances the SSA specialist did not discuss the advantages of waiting to file for Social Security in order to receive a higher benefit. This is meaningful because according to the GAO's report more than a third (36%) of Social Security enrollees opted to enroll at an SSA office in 2015. It's disconcerting to think how many people may have opted to receive benefits sooner, not realizing that waiting could have resulted in a bigger paycheck during retirement.
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Per the SSA, specialists aren't meant to give advice to seniors. Instead, they're there to provide the pros and cons of a decision in order to make seniors aware of the ramifications of their choice. But as the GAO's report contends, there were inconsistencies in their pursuit of this goal.
Also noteworthy, in just one of the 10 interviews where retirees considered claiming a lump-sum on retroactive benefits of up to six months did the SSA specialist discuss that doing so would lead to a permanent reduction in monthly benefits. The fact that this trade-off was not discussed is worrisome.
Though there are many reasons why seniors might choose to claim benefits early -- according to data from the Centers for Retirement Research at Boston College, about 45% filed for benefits at age 62 in 2013 -- it's quite possible that a lack of information or disinformation is partially responsible.
The most important Social Security chart you'll ever see
The easiest way for seniors to avoid making a Social Security claiming mistake they'll regret later is by being informed. The following Social Security chart, which is arguably the most important Social Security chart you'll ever see, speaks volumes about the pros and cons of when you file for benefits.
The Social Security retirement benefit schedule for people born between 1943 and 1954. Chart by author. Data source: Social Security Administration.
As you can see above, Social Security benefits tend to grow by 8% for each year that you don't file for benefits, with your maximum and minimum benefit being a function of your full retirement age (FRA) benefit. Your FRA is the level at which you'll receive 100% of your retirement benefit. This means that if you sign up for Social Security at any point before reaching your FRA, your monthly paycheck will be less than 100% of your FRA benefit. Meanwhile, holding off on filing a claim until after you hit your FRA will result in a paycheck larger than 100% of your FRA benefit.
For those of you born between 1943 and 1954, which is what the chart above reflects, your FRA is 66 years, meaning your benefits could be as low as 75% of your FRA benefit if you file as soon as possible at age 62, to as high as 132% of your FRA benefit if you wait until at least age 70.
For those born in 1960 and after, your FRA is 67 years. Filing as early as possible could reduce your take-home to just 70% of your FRA benefit, while waiting can max it out at 124%.
Lastly, those of you born between 1955 and 1959 will see two-month successive increases to your FRA (i.e., 66 years & 2 months for people born in 1955; 66 years & 4 months for people born in 1956, and so on) with each passing year. This could lead to a benefit payment of between 70% and 75% on the low end and 124% to 132% on the high end.
Long story short, waiting will boost your benefit payment, but waiting may not be the right decision for everyone.
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Seek a second opinion
Beyond understanding the important concept of how benefits increase over time, being able to bounce your ideas off of someone knowledgeable is a great idea, too.
As the GAO's report showed, most SSA specialists were giving seniors the pros and cons they needed to hear to make smart claiming decisions. However, there were enough anomalies in the GAO's report for seniors to give serious consideration to getting a second opinion from a financial advisor before making their claiming decisions final. A financial advisor may even wind up offering alternative ideas that you haven't even considered. Best of all, since you remain in complete control of your retirement, you can pick and choose what advice to implement.
Utilizing a financial advisor is unlikely to be free, but the peace of mind it could bring in terms of possibly helping you net tens of thousands of extra dollars in benefits from Social Security over your lifetime could be well worth it.
Consider the mulligan option
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Finally, seniors who've claimed Social Security benefits recently need to be aware that a "mulligan" exists if they're having regrets about signing up early. SSA Form 521, officially the request for withdrawal of application, allows you to withdraw from receiving Social Security benefits so long as you file your request within the first 12 months following your initial claim. You'll also have to pay back every cent in benefits you may have received. If you do so, it'll be as if you never filed for benefits in the first place, and your eventual payment will continue accruing at 8% per year until age 70.
SSA Form 521 is a particularly handy tool to consider if you wind up going back to work shortly after filing for benefits, or if you determine that you have ample capital from retirement accounts to support your monthly expense needs in retirement.
It all comes down to being informed. Being proactive and staying informed should help you get the most out of Social Security.
