For Americans, few decisions are as financially consequential as choosing when to take Social Security. Or as hard.
While you can tap retirement benefits as early as age 62, the federal government offers big financial incentives to wait. The rules are complicated, however — books have been written on Social Security’s intricacies. And choosing to delay activation raises some arguably existential questions: If you maximize your benefit by waiting until age 70, what are you supposed to live on in the meantime? And what if you die earlier than you expected?
Here’s some guidance, touching on a few new studies, for those looking down the barrel at their golden years.
Postponing may be even more lucrative
For every year you delay taking Social Security, the program boosts your monthly check by 7 percent. (In addition to any cost-of-living increases over those years.) By waiting until age 70, workers can get a guaranteed, inflation-adjusted income stream that’s 76 percent higher for the rest of their lives.
That figure — 76 percent — is often quoted by Social Security experts. But according to a new study, it “sells short how much delayed claiming can increase Social Security income, especially among women.”
It’s more like 85 percent for older Americans who stay in the workforce, according to Matthew Rutledge and John Lindner of Boston College’s Center for Retirement Research. The extra 9 percent comes from how Social Security calculates the amount of money each retiree should get. Since the program bases benefits on a worker’s best 35 years of employment income, it penalizes those whose careers had periods of low earnings, or years when they earned nothing. Almost half of women — who often interrupt their careers to raise children — have at least one year with zero earnings among their top 35, for example.
By working longer, these workers can replace some of those low-earning years with higher-earning ones. An extra year of work would boost the average woman’s monthly benefit by 8.6 percent per year, Rutledge and Lindner calculate, rather than 7 percent. Because men tend to have longer careers than women, they get a smaller boost, of 7.8 percent for each extra year they work. Those are just averages, however, and the benefit of working longer could be much higher for workers who have had shorter or less lucrative careers.
Many more Americans seem to be taking this advice, as the chart below illustrates.
The improving economy helped make this possible. With the unemployment rate down from over 9 percent in early 2011 to below 5 percent today, it’s become far easier for an older American to get a job or keep a job. Indeed, more Americans are working past 65 than at any point in the last 50 years.
Delaying Social Security is a no-brainer if you live to 101, but predicting how long you will live is a generally unanswerable question. (Photo: iStock)
Certain groups should think twice about waiting
Getting the most out of Social Security comes down to a terrible, generally unanswerable question: When are you going to die? If you’re going to live to 101, delaying Social Security is pretty much a no-brainer. If you’re destined to die at 71, you might as well take the money as soon as possible.
The average U.S. life expectancy isn’t much help to retirees pondering their demise. One reason is rising inequality: Even as the well-off are living ever longer lives, the latest data show the average American’s health is getting worse.
Related: 17 unexpected expenses in retirement
A key variable is education, according to another study released this month by the Center for Retirement Research. Researchers Geoffrey Sanzenbacher and Jorge Ramos-Mercado calculated the best times for various demographic groups to take Social Security if they want to maximize the expected present value of their benefit stream.