Be thoughtful with timing of Social Security retirement


Paul Hamilton | More Than Money | Posted: Friday, January 29, 2016 7:12 am  

Question: I am a 66-year-old lifelong bachelorette. I have just retired from a career in real estate sales where my typical income was $45,000. I visited the social security office in Lexington and was told I could begin my social security benefits next month and receive $1,500 monthly. I came across a financial website that claimed there are social security strategies that would add $200,000 to my lifetime social security benefits. Are these claims valid? If so, what are the tricks?

The timing of when to start Social Security benefits is an important part of retirement planning.

As you may know, social security benefits are paid for life (or as long as the U.S. government is solvent — but that’s another column). These benefits are adjusted annually to keep up with the rising cost of living.

Without any current or past spouses — and I assume no minor children — your benefits will be paid based on your own earnings and only to you. You have reached what the Social Security Administration calls “full retirement age” of 66 (this will be shifted up to 67 in few years). You can start your benefits now and receive the equivalent in today’s dollars of $18,000 annually for the rest of your life.

Let’s suppose you live to 82. Your total benefits would be $288,000 — 16 years of receiving $18,000 per year.

But each year you delay benefits past age 66, your benefit will increase by 8 percent. If you can hold off starting benefits until 70, then your benefit will be $23,760 — 32 percent higher than the $18,000 you would have received retiring at 66.

If you live to age 82 under this new scenario, the total benefits will be $285,120. The benefits are set up such that they are “actuarially fair” — a single person will receive about the same benefits whether they start benefits at 66 or 70 (or any age between 62 and 70) and live to their life expectancy of 82. Of course, you may live to age 99 or pass away tomorrow, so averages aren’t always the best target.

This is where many popular financial planning outfits such as are able to come up with much higher projected lifetime benefits. The general idea is that you should plan for the ‘best-case’ scenario of living to 90 or maybe even 100.

The reasoning behind this is that if you die “young” — say, in your 70s — then you didn’t need the extra money. But if you live into your 90s, you’ll be grateful for the much higher social security benefits.

Suppose you live for thirty years after retiring. Your lifetime benefits would be $540,000 if you start them at age 66, but they will be $712,800 if you wait until 70. But this $172,800 in extra lifetime benefits is only as valid as the assumption of you living to 96.

So when is the real best age for you to begin social security? That decision has to be based on what other retirement income sources you have — such as a pension, 401(k) or annuities — and how they can meet your living expenses over an unknown future.

Many financial professionals will side with the software and advise you to be patient and hold out to age 70 for social security. But only about 2 percent of retirees wait that long.

I recommend that you liberally plan the next 16 years of life – big vacations, generous gifting to family and charities and even negative events like high medical or long-term care expenses.

If $18,000 a year along with your other financial resources will support your “lavish lifestyle” until 82 — and you’re OK to live simply on $18,000 and whatever money may still be available for the rest of your days, then start social security right now.

If you can’t meet your lifestyle goals, then it may be best to delay social security and forgo that cruise around the world.