Page 14 - Investment Advisor April/May 2022

RETIREMENT PLANNING

By Michael Finke

Why Claiming Social Security at 64 or 67

Could Be a Big Mistake

At these ages, waiting just one more year provides a significant jump

in benefits.

he bonus retirees get from wait-
ing to claim Social Security
Tincome benefits increases in two
steps. These steps, originally created as a
shortcut to simplify benefit calculations,
result in differences as high as $10,000
in the incremental value of waiting an
additional year to reach each new step.
Claiming before the valuable step-
years can be a costly mistake. Workers
who claim at full retirement age lose a
significant amount of wealth by not tak-
ing advantage of the most valuable 8%
one-year step increase.
A worker in 2022 who is eligible
to receive $20,000 in Social Security
income benefits at age 62 can increase
her income by waiting to claim up to age
70. The percentage increase is 5% each
year up to age 64. It steps up after her
64th birthday to 6 2/3% each year up to
her full retirement age (67 for someone
born in 1960). After reaching 67, the
bonus steps up again to 8% a year until
age 70.
The delayed claiming income step
formula is supposed to be actuarially
fair. Because the government expects to
make more stepped-up payments to a
63-year-old than a 68-year-old, the per-
centage increase from waiting an addi-
tional year is lower.
In reality, the formula isn’t actuari-
ally fair. The percentage increase from FAIR VALUE ing. A 62-year-old who delays claiming
deferral should rise gradually each year The actuarially fair value of delayed to age 63 gives up $20,000 this year, but
instead of increasing at ages 64 and 67. claiming can be calculated by taking gets an additional $1,000 of inflation-
These two steps mean that the gain from the present value of the higher future adjusted income per year for the rest of
waiting an additional year is higher the income payments discounted at current her life.
first year of each step, and understand- rates for Treasury inflation-protected How long will she live? We can use
ing how the amount varies presents a securities (TIPS), and then subtracting mortality tables to estimate the value Adobe Stock
planning opportunity. the year of income lost by delayed claim- of future income. Each payment is then

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