When to begin drawing Social Security is an important decision for all retirees; however, it is an even more critical decision point for women. Whether a woman is currently married, divorced or widowed, there are specific risks and issues she faces around the Social Security decision that men typically don’t face.
We’ve all heard about the most common risks:
- Women have lower lifetime earnings, resulting in
- Lower pensions (if any), and
- They live longer lives than men.
Every decision around when to draw Social Security is based on longevity. If we knew how long we were going to live, we would know exactly when to draw on benefits! The consideration is that you’ll take approximately a 25 percent reduction if you take Social Security at 62 instead of at your full retirement age benefit (somewhere between ages 66 and 67) vs. the attraction of gaining 8 percent per year on your Social Security benefit for each year you wait to elect benefits. There are a variety of online calculators available to help determine the perfect time to draw those benefits, but keep in mind, they all depend on the best guess of how long a person will live.
The breakeven point in almost all scenarios is about age 80. If you think you’ll live considerably longer than age 80, you will want to wait as long as possible before applying for Social Security benefits. No one in your family has ever lived past age 80? You might apply as soon as possible.
Given the risks, the impact of your client’s decision about when to draw Social Security is compounded. So what can you and should they do when considering this decision? Here are some key things to ponder:
1. Examine the value of working longer
When you’re reviewing overall planning, if there’s a gap between where the client is and where they would like to be, one of the things within their control to help close the gap is to work longer. This is particularly important for women because they’re likely to have lower lifetime earnings. Those earning years at the end of a career can have a compounded positive benefit.
2. Understand the value of Social Security benefits
Once started, Social Security benefits provide a cost-of-living adjusted benefit that cannot be outlived. The higher the benefit when the recipient begins drawing, the more compounding accelerates their benefit through the years.
3. Develop a strategy for using retirement resources like IRAs in combination with Social Security
Whether someone is single or married as they approach the Social Security decision will make a difference. Since women generally live longer than men, you may encourage the husband to wait to begin benefits. If the generalities play out, the husband’s benefit is likely higher than the wife’s and her life expectancy is greater, so using retirement accounts while waiting for the husband to draw on Social Security effectively provides higher income while they both are alive, as well as acts as a higher survivor benefit, no matter who passes away first.
Now let’s look at these keys from the perspective of various scenarios specific to women.
Single woman, never married
This individual is planning her Social Security timing around her retirement date, assets and best estimate of longevity. If she doesn’t plan to retire prior to her full retirement age, we know she’ll at least benefit from the full value of her Social Security benefit. The next step is reviewing her assets to determine whether she has the resources to supplement her income from full retirement age to age 70. If her family history indicates that she may live well past age 80, waiting until age 70 to begin benefits can be an important component of her retirement.