One of the most important financial questions you'll face in retirement is when to claim Social Security. The most popular time to start getting retirement checks is right when people turn 62, which is the earliest allowable age for most workers. However, the way benefits are calculated can make it smarter to wait. You'll find plenty of arguments on all sides of the issue, but as you'll learn later in this article, one smart way to rise above the debate is to go back to Social Security's original purpose as an insurance program.
Doing the math
One popular way to determine when you should claim Social Security benefits is to analyze which option will get you the largest amount in total lifetime benefits. In general, the earlier you claim your benefits, the smaller the monthly payments you'll receive. If you were born between 1943 and 1954, then claiming at 62 will get you only 75% of the monthly payment you'd receive by waiting until your full retirement age of 66. Waiting until age 70 gives you 132% of that full-retirement-age monthly payment.
Even though delaying leads to larger payments, it takes time for those larger payments to catch up with the head-start that you can build up if you claim early. Many breakeven analyses conclude that if you live beyond your late 70s or early 80s, it pays to wait, but if you expect not to live that long, then claiming early is the smarter move. However, most breakeven models fail to account for the secondary impacts of claiming decisions, such as the possible impact on survivor benefits for a spouse or children.
Why modeling alone isn't enough
As compelling as breakeven analysis can appear, there are many variables that are difficult to incorporate into models. If you don't actually need the money, you could afford to wait, or you could claim early and invest what you receive. Whether that makes sense depends greatly on the investment returns you're able to generate with the money. Investing your benefits may seem like a smart decision if you assume you'll earn 10% annually in a stock portfolio, but if you end up earning less than that -- or even losing money -- then it will turn out to be quite a poor decision. Similarly, different tax rules can make various claiming options look a lot different from one person to the next, even if all other factors are essentially the same.
Life expectancy also plays a key role in decision-making about Social Security, and it's difficult to predict how long you'll live. Life expectancy tables are easy to find, but they can't take into account your own unique health attributes. It can be tempting to consider your family history. However, your behavior plays a major role in your life expectancy as well, so it's dangerous to estimate your life span based on those of deceased relatives.
Finally, don't just measure the value of your benefits in terms of dollar amounts; give some serious thought to when that money will be most valuable to you. For some retirees, $1 received in their 60s is a lot more valuable than a greater amount of money in their 70s or 80s, when they can't use that money to do the things they enjoy most. In other words, while you might get more money by waiting, you may still want to file for Social Security early and make the most of it while you're relatively young.
Looking at Social Security as insurance
One thing that many people don't think about is that Social Security began as a form of social insurance. Early on, a retirement age of 62 to 65 was a lot harder for American workers to attain. Fewer workers reached an age when they could claim Social Security at all, and those who did typically didn't live nearly as long as they do now. That made people see Social Security as more of an unexpected bonus, rather than something to rely on during retirement.
That mindset has changed. But you can still look at your claiming decision in the same way you'd look at making an insurance claim.
Specifically, most people make claims against insurance when the event they're insuring against actually happens. So if you own auto insurance, you'd claim if you got in a car accident. Similarly, if you think of Social Security as being retirement insurance, then it's natural to claim Social Security when you retire.
Stake your claim when it's time
Many near-retirees think about the issue in the opposite way, figuring they'll retire when Social Security pays enough to let them live securely in retirement. But deciding when to stop working should ideally be more than just a financial decision. Given how much of one's personality and self worth is wrapped up in a job, being smart about career decisions requires going beyond money. If you think about it that way, then it makes the most sense to claim Social Security after you've made a retirement decision that's largely independent of the program.
If you're more comfortable relying on mathematical models and the assumptions behind them, then they can help you make a reasonable and rational decision about Social Security. But if that approach doesn't help you, try thinking about Social Security as retirement insurance, and see if that helps you come up with a decision you can live with more easily.