The Social Security system sends benefit payments each month to more than 60 million people. Of those 60 million, two thirds are retired workers aged 62 and up.
For many of these retired workers, Social Security income will play an important role in determining whether or not they can "afford" retirement. A 2015 poll from Gallup questioned current retirees as to how much they're currently reliant on Social Security income to meet their monthly needs. Roughly 6 in 10 count on Social Security as a major source of income, with another 3 in 10 viewing it as a minor source. Put plainly, Social Security provides a financial foundation for tens of millions of seniors annually, and its importance cannot be overstated.
America's most important entitlement program is in trouble
But the program itself isn't on solid footing. As baby boomers leave the workforce at a pace of roughly 10,000 people per day, the worker-to-beneficiary ratio is expected to dwindle from its current 2.8-to-1 to 2.1-to-1 by 2035. In simpler terms, this means not enough new revenue is being generated by the Social Security payroll tax to cover the benefits needed to pay the number of expected eligible retirees in the coming decades. People are also living longer than ever, further pressuring the Trust. The Social Security Board of Trustees is forecasting an exhaustion of the cash reserves in the Trust by 2034.
"What happens then?" you wonder? Although any number of tax increases or benefit cuts could come about, the Trustees' report has suggested that up to a 21% cut in benefits could be needed to allow Social Security to continue making payments through 2089. Seniors who fall into the aforementioned 6-in-10 category and are reliant on Social Security can ill afford a cut this large. Thus, when you decide to take Social Security is quickly becoming one of the most important decisions you'll ever make.
Seniors have the option of signing up for Social Security beginning at age 62, and data from 2013 shows that nearly half of men and women will do so at this age. By comparison, just 1 senior in 10 chooses to wait until after their full retirement age -- the FRA is a dynamic number based on your birth year that pinpoints when you're entitled to 100% of your benefits payment -- to sign up for Social Security. This is important, because each year Social Security benefits go uncollected until age 70 your monthly benefits grow by approximately 8%, as you can see in the chart above.
Is waiting to file the best choice for you?
If you choose to take benefits as soon as you turn 62 with an FRA of 66 years, your benefit could be as low as 75% of your FRA benefit. Conversely, waiting until age 70 to file for benefits could allow you to net 132% of your FRA benefit. That's a big difference in monthly/annual income, and for certain types of people waiting can make a lot of sense. Here are three types of people who'd more than likely benefit by waiting to take Social Security until age 70.
1. Seniors in good/exceptional health
An obvious beneficiary of waiting to file until age 70 would be seniors who are in good or exceptional health and expect to live a long life.
Currently, the inflection point for the Social Security system is about 78 years of age, meaning if you file at age 62 or you file at age 70, by age 78 you've collected a pretty equal amount of lifetime benefits. If you believe you're going to live beyond 78 years, then holding off on enrolling for benefits would be a smart move since you could net considerably more in lifetime benefits despite waiting an additional eight years (from 62 to 70). Of course, no one knows with any certainty how long they're going to live, but your personal health history, and the health of your immediate family members, should help guide your decision.
2. Seniors with little or no savings
This one's a bit tricky, but pre-retirees barreling toward age 62 with little or no retirement savings should strongly consider holding off on claiming benefits and instead focus on working longer if their health permits.
On paper, the inclination for those with little or nothing in retirement savings is to claim Social Security immediately in order to boost their income. Unfortunately, this locks seniors with little or no savings in at a reduced benefit for life. Not to mention, between ages 62 and the year you hit your FRA the federal government can withhold some, or all, of your benefits if you earn too much.
Waiting has a few key advantages for seniors who can still work. First, it allows you to pay your monthly expenses with income from your job while allowing your benefit to grow at 8% per year, netting you a bigger payment once you hit age 70. Secondly, working longer could allow you to start, or add to, a retirement account. Although you'll have lost a lot of time and compounding potential, starting to save and invest now is always better than later, no matter your age. Finally, working longer could boost your benefit. The Social Security Administration averages in your 35 highest income years when calculating your benefit. If you happen to earn more during your senior years (which isn't too far-fetched, since you'll likely be toting around lots of work experience), it could replace your lowest income year and boost your benefit.
3. Higher income spouse
Waiting can also be a smart solution for a spouse with a substantially higher income than their partner. In instances where there are large differences in lifetime earnings and Social Security benefits, it can make sense for the lower income spouse to file early for benefits in order to generate some income for the household. Meanwhile, the higher income spouse allows their benefit payment to grow over time, eventually building to as high as 132% of FRA if he or she waits until age 70.
Furthermore, if the lower income spouse outlives the higher income spouse, the lower income spouse can then choose to take the survivor benefit attached to the higher income spouse's work history. Waiting to file until age 70 can be a smart strategy for the higher income earner to protect their spouse after they're gone.
What strategy is right for you? The answer will vary from person to person, but as we've seen above, there are certainly merits to waiting until age 70 to sign up.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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