Most Americans know they'll rely on Social Security for a substantial chunk of their income in retirement. But as much as most people recognize that fact, they don't always understand just how valuable their Social Security benefits will be. In particular, if you focus too much on what the size of your monthly check will be rather than on the total value of your benefits throughout your lifetime, then it's easier to discount the added advantage of waiting beyond the earliest possible age to claim Social Security.
A recent study published in the Journal of Retirement considered the best time to claim Social Security benefits. The study produced several helpful conclusions about the best way to structure your decision-making process to get the most you can from Social Security. But one comment the authors made early on provides a startling truth about Social Security.
Putting Social Security into perspective
In making decisions about Social Security, many people look primarily at the monthly benefits that they'll receive. With the typical retired worker getting $1,294 in monthly Social Security benefits, whether you apply immediately at age 62 or wait until full retirement age or beyond to start collecting monthly payments seems like it has a relatively small impact in dollar terms. For instance, when faced with the prospect of collecting $900 monthly at age 62 or $1,200 at age 66, it's easy to discount the loss of $300 of additional monthly income by emphasizing the value of getting four extra years' worth of payments upfront.
But the study looks at Social Security benefits from a different perspective that makes the true magnitude of benefits under the program much clearer. According to the study, the typical expected value of lifetime Social Security benefits for single retirees between 65 and 69 years old is $230,000. For couples in that age group, total lifetime benefits add up to $470,000.
Moreover, if you earn a higher income than average, then your Social Security benefits are even more valuable. The study estimates the value of benefits at $390,000 for high-income singles and $710,000 for high-income couples.
The study authors note that in many cases, Social Security represents retirees' largest asset. With average retirement account balances well below those figures, most Americans haven't done a good job of saving on their own. Moreover, even those who've built up considerable equity in their homes won't necessarily be able to get that large a payoff even if they choose to sell and downsize into more modest living quarters.
The value of waiting
Knowing that Social Security is valuable doesn't necessarily help you make the best decision, though. The study notes that half of women and 45% of men claim Social Security at the earliest possible age, and nearly all of the rest claim at some point between 62 and full retirement age of 66.
But when you see the dollar amounts involved, it can lead you to be more mindful about making a smart Social Security decision. Based on following the best available strategies, the study found that single retirees can boost their overall take from Social Security by $55,000 to $70,000 simply by waiting until the ideal age to take benefits. Married couples can earn even more, with additional benefits of around $150,000 coming from using a combination of strategies to maximize the amount received from Social Security.
These results are based on assumptions about returns and life expectancies. But notably, they fly in the face of an often misunderstood statement from the Government Accountability Office asserting that someone who lives to average life expectancy should receive about the same amount in lifetime Social Security benefits regardless of when they claim. Indeed, even the GAO recognizes the limitations of that statement, noting that married couples can see considerable costs by claiming early, as the decision can adversely affect not only the workers' own benefits, but also the survivors' benefits for a surviving spouse and children.
Further, for those who have amply prepared for retirement with outside assets of their own, the study found that the longer retirees wait before claiming Social Security, the longer their total assets can sustain them financially. Looking at those with $1 million in retirement assets, waiting beyond age 62 added between two and five years to the length of time retirees could expect to go without running out of money. Given the importance that most retirees place on making their nest eggs last, getting the added peace of mind of guaranteed Social Security income has definite value.
How to make the most of Social Security
Navigating all the options available to you regarding Social Security can be hard. But in general, couples should look closely at strategies like file and suspend and filing as a spouse first to see whether they can increase their total family take from Social Security. Even singles should weigh their own health condition against the added money available to see whether delaying benefits makes sense for them.
Social Security benefits represent a six-figure asset for most retirees, and making the right decision will make a huge difference in your quality of life in retirement. By taking every factor into consideration, you'll be more likely to make a choice that will leave you in the best financial position possible.
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