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Getting paid to wait: The Social Security secret your clients need to know

By Brian Doherty

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Social Security has never been more important to retirement success. With the decline of corporate pension plans, it is the only source of guaranteed income for many of today’s retirees. It’s critically important to help your clients make the most of it so that they can have a successful retirement.  

From all the research I’ve seen from top financial academics across the country, I have come to one simple conclusion about Social Security: It’s all about getting to age 70. By delaying to age 70, there are numerous powerful financial advantages for retirees beyond just maximizing the size of their Social Security benefit. It’s your job to share these compelling factors with clients, and then show them how to make it as easy as possible to delay.

Retirees can claim Social Security anytime between the ages of 62 and 70. Claiming at age 62 will result in the smallest Social Security benefit possible for life. Alternatively, claiming Social Security at age 70 maximizes Social Security benefits. Over the last three decades, the number of people claiming Social Security at age 62 has fallen to nearly its smallest percentage yet, although it is still the most popular age to claim. However, more people are realizing the benefits of waiting. In fact, the number of people claiming at age 66 has grown to its highest percentage in nearly 30 years. Very few people wait to age 70 to claim their benefits and I believe that is a big mistake.  

Three compelling reasons to maximize Social Security benefits

First, most people don’t truly understand life expectancy and they underestimate how long they are going to live. Life expectancy is a mean average. This means 50 percent of people live beyond their own life expectancy. However, the other aspect is that the longer a person lives, the further out they push their life expectancy! Male life expectancy is age 75. However, if a healthy male reaches age 62, his life expectancy increases to age 84. For women, their life expectancy increases from age 80 to 86. One of the best ways to decrease the risk that a person is going to struggle financially in retirement regardless of how long they live is to maximize Social Security. 

Another factor to consider is Social Security’s cost of living adjustment (COLA). I consider this to be one of the greatest gifts we receive from our federal government because it’s free for Social Security recipients. Traditionally, COLA has resulted in a 3 percent annual increase. While everyone receives the same COLA every year, those who receive a bigger Social Security benefit will receive a bigger real dollar increase. An individual receiving a $1,000 monthly benefit would see a $30 monthly increase, but an individual receiving a $2,000 monthly benefit would see an increase of $60. This may not seem like much, but over the course of a long retirement this extra pay increase adds up. By maximizing Social Security benefits, clients also maximize the size of their real dollar increases they receive from COLA every year. 

Last, retirees need to consider how they can maximize their Survivor Benefit. I call Social Security a woman’s issue because women have longer life expectancies than men and therefore are typically the recipient of the Survivor Benefit. In fact, out of 10 million recipients of the Survivor Benefit, 8 million are women. By maximizing the size of the breadwinner’s Social Security benefit, a married couple also maximizes the size of the Survivor Benefit. This decreases the chances that the wife will struggle financially if her husband passes away first.   

The “Getting Paid To Wait” Strategy

After your clients understand the importance of maximizing their Social Security benefits, then you need to show them how to make it easier to delay. By strategically timing the claiming of the Spousal Benefit, clients are able to receive Social Security income while they are still delaying claiming their benefits. The Spousal Benefit entitles one spouse at Full Retirement Age to claim 50 percent of the other spouse’s Full Retirement Age benefit.

Using married couple Cris and Lee, you’ll see that Lee claims her Social Security benefit of $845 per month at age 62. Cris doesn’t claim any benefit at age 62, so from age 62 to age 65 Cris and Lee receive only Lee’s benefit. At age 66, Cris claims and restricts his benefit to only a Spousal Benefit and starts to receive a Social Security check of $633 per month. This is roughly half of Lee’s Full Age Retirement Benefit, but it’s actually a bit more. This is because the four prior years of COLAs are applied to that benefit! With this in mind, their monthly income grows to $1,584. 

Even though Cris is receiving some Social Security income in the form of a Spousal Benefit, he continues to reap the rewards of delaying his own Social Security benefit. His unclaimed Social Security benefit will increase by 8 percent for every year that he delays. Then, at age 70, Cris switches from the Spousal Benefit to his maxed-out Work History Benefit of $2,508 per month. Now, Lee and Cris’s combined annual Social Security income jumps to $42,936. Most impressively, while Cris delayed claiming his Work History Benefit until age 70, they were able to collect a total of $121,884! This is the amount of money that they were “Paid to Wait.”

In today’s turbulent economic environment, Social Security is now the cornerstone piece of a safe and secure retirement for most Americans. For clients who are healthy and have the financial resources to delay, their best option will likely be to maximize their benefits. It is important that they understand the full advantages of delaying, and that delaying until age 70 does not necessarily mean they have to wait that long  to receive any Social Security income. Believe it or not, retirees can get paid to wait! Now it’s up to you to show them how.