Social Security and Longevity

| July 2, 2018 | 0 Comments

Every year, the Trustees for Social Security release a report which discusses the funding of the Social Security program. While it’s possible that Congress may enact changes to the Social Security program at some point in the future, we can’t predict how (or even if) that might take shape. With the caveat that there is a potential change in the structure of the program in the future, it still got me thinking about Social Security benefits and when is the optimal time for retirees to claim theirs.

Longevity
People are generally living longer today, but Social Security hasn’t been fundamentally changed since 1956. A 65 year-old retiree in 1956 had an average life expectancy of about 12 years (77). Today, a 65 year-old man retiring at age 65 has a life expectancy of almost 20 years. A 65 year-old woman can expect to live to 86. Roughly one out of four people retiring today will live past 90, and for highly educated, affluent people, the chances are even better. For couples, the average survivor will live 11 years past the death of his or her spouse.

Social Security
Although the Full Retirement Age (FRA) for Social Security has been adjusted slightly from 65 to 66 today (and 67 for many younger workers), a worker who retires before FRA will have their benefits reduced by about 6.7 percent for every year that you start early. If you are like most Americans and begin collecting at age 62, this works out to about a 25 percent reduction in benefits for life. Thus, if you would be entitled to $2,000 per month at full retirement age, starting early could reduce that to as little as $1,500. That’s a $500 per month reduction for the rest of your life. If you live 30 more years, that amounts to $180,000 in lost income.

Conversely, if you can wait until age 70, your benefits would be increased by about 37 percent, or $740 per month. For Life. What’s the difference between taking benefits at age 62 versus waiting until age 70? $1,323 per month, for life, or almost double what you would get starting at age 62. Furthermore, if you are still working before Full Retirement Age and claim Social Security benefits, those benefits will be reduced by up to $1 for every $2 you earn over $15,480.

Maximizing Social Security
For single workers, it is almost always better to wait until 70 to claim your benefits. The reason for this is that if you can live off other savings, the annual increase in Social Security payments amounts to a permanent increase in your annual income, with an annual inflation adjustment. Delaying Social Security basically amounts to longevity insurance, since it will pay benefits as long as you live.

For couples, who tend to live (jointly) longer than single people, the benefits can be even greater. Most often, the high income earner should delay taking benefits until age 70 while the lower income earner claims benefits at Full Retirement Age (66 or 67). Using this strategy, when the higher earner passes away, the survivor will receive the greater of the higher earner’s benefit or his or her own. This permanently raises the survivor’s income by a very meaningful amount for the (average 11) remaining years of his or her life.

There is no one-size-fits-all strategy for Social Security benefits. And maximizing Social Security benefits assumes you have other resources to fund retirement spending between retirement and age 70.

The research, however, is quite clear on one very important point: for almost every retiree, even those in poor health with relatively low life expectancy, taking benefits early is a very poor strategy with very real long-term costs. For couples, the impact can be especially significant. You should consult a Certified Financial Planner® professional to review your specific situation, needs and resources.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at brooks@bfadvisors.com. Brooks and his family live in Mission Hills.

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