Today we’re going to continue sharing thoughts from the book How to Retire by Christine Benz.
It’s a great book which I highly recommend. And as with the last article, I’ll be giving away a copy of the book at the end of this post.
We’ve already posted on this book as follows:
You may want to check these out if you missed them.
All About Social Security
Today we’re covering chapter 4 where Christine interviews Mary Beth Franklin, who is supposedly “one of the United States’ pre-eminent experts on the ins and outs of Social Security.”
Obviously you can’t have a retirement book that attempts to be somewhat comprehensive without a discussion of Social Security (SS). I get that.
But I feel like we’ve beaten this horse to death with the same analysis and the same conclusions year after year after year with the main takeaways being:
- In order to fully maximize SS for certain, you need to know when you’re going to die (and if married, when your spouse is going to die as well).
- Since none of us know that, we are all simply making guesses at how long we will live, what will happen in those years, etc. In other words, there are a lot of unknown variables so let’s just recognize up front that we likely won’t maximize our SS benefits…and that’s ok.
- SS, like any other personal finance issue, is personal. What may work for you might not work for me and vice versa.
- So let’s move past being adamant about X or Y being the “best/only/smartest” way to take SS and just focus on the few things we should consider as part of our decision-making process.
I think those issues have been pointed out enough times we could all probably recite them from memory. However, I’ll include those just in case someone has missed them, but in this post I’m mostly going to cover the items they discuss that are critical, reinforce what I’ve already said, or add some sort of new thought or perspective to consider.
The Standard Response
Here’s the information most of us have seen already:
Deciding when and how to claim Social Security benefits is one of the most important decisions that retirees will ever make. In an era when pensions are the exception rather than the rule, Social Security represents one of the few sources of guaranteed income that lasts a lifetime, no matter how long you live. Plus, unlike many private pensions, Social Security benefits are adjusted for inflation to help retirees maintain their buying power over time.
You can claim benefits as early as 62, which for some people might make sense, as long as they are aware that their benefits are permanently reduced if they claim before their full retirement age. In addition, people who claim early and who continue to work will get this permanent haircut for claiming early, and may also lose some or all of their benefits, at least temporarily, if they make too much money, which is defined as about $22,000 a year in 2024.
If you wait until your full retirement age, which could be anywhere between 66 and 67, depending on when you were born, you get your full benefits that you have worked so hard for. But if you’re able and willing to wait a while, you can earn a spectacular 8% extra per year for every year you postpone claiming beyond your full retirement age, up until age 70. For example, if you retire at age 67, and you wait three years to claim, at age 70 you’re getting an extra 24% on top of your full benefit. Now you’ve got this bigger benefit base. And each year, when there’s a cost-of-living adjustment, it’s applied to a bigger base.
You’re going to get more Social Security benefits over your lifetime if you delay and you live until at least average life expectancy. If you live longer, delaying is a really good decision. If you don’t live to average life expectancy, maybe it wasn’t the best decision for you.
The summary is:
- For most people, wait until you are at least full retirement age to collect benefits.
- If you can, wait even longer to 70.
- That said, if you die early it’s not the best deal. Hahaha.
Seriously, there may be reasons to claim early…which is what they cover next…
Three Times to Claim Early
Mary Beth adds to what she said above with the following:
It makes sense to claim earlier in three instances. First, if you’re in poor health and not likely to make it to average life expectancy, and you’re single, it makes sense.
Second, if you need the money. Think of how many older workers lost their jobs during the Covid pandemic. They were forced to retire sooner than they thought, and maybe that retirement income plan isn’t quite what they had pictured. If you need the money, go ahead and take it.
Third, filing early might make sense for some married couples with different earnings histories, one higher, one lower.
For example, one spouse, preferably the one with the bigger benefit, might decide to delay until 70. In that instance, the other spouse, who might have been the lower lifetime earner, may want to go ahead and claim benefits early at 62, even though her retirement benefits would be permanently reduced. That’s because its likely that her survivor benefit is ultimately going to be bigger than her own benefit. If the higher earner waits until age 70 to claim the biggest retirement benefit possible, it will likely translate into the biggest survivor benefit possible for the surviving spouse if the higher earner dies first.
It’s important to realize that retirement benefits and survivor benefits represent two different pots of money. Even if the lower earner claims her own retirement benefit early, and that benefit is permanently reduced, she still could get full survivor benefits if she is at full retirement age when she claims a survivor benefit. Survivor benefits are worth 100% of what her late spouse was collecting when he died. So, there is this possibility for married couples to have one delay and the other one claim early, bringing some cash flow into the household. If the early filer is ultimately the surviving spouse, she is still likely to get a survivor benefit that’s maximized based on her late husband’s benefit.
So yes, there are three groups of people who may want to claim early. You’re sick, you need the money, or maybe you’re the lower-earning spouse in a couple. If you’re sick and married, and you are the major breadwinner, it does not necessarily make sense to claim early. Because if the bigger earner is diagnosed with a terminal illness and claims at 62, they’ll get 70% to 75% of their full retirement age benefit because they’re claiming early. When they die, the surviving spouse’s survivor benefit is based on that reduced retirement benefit.
Is your head spinning?
How many times was “if” used above (or something talking about a potential but not known situation)? A hundred? More?
If this, then that. But if that, then something else.
The problem is that we don’t know the answers to most of the ifs, so we only know if we made a good/the best decision after the fact (and after it’s too late to go back and make another decision).
Here’s what I recommend:
- First decide what you want to use Social Security for. Is it to enjoy, for vital, needed income, as an “insurance policy” for the spouse left behind, etc.?
- Once you know that, then you can make a decision that works well for what you want to accomplish…not some guess just so you can “maximize” your benefits. Maximizing your SS is a fool’s game and will likely drive you crazy.
And just to take all the pressure off yourself if you’re fretting about what’s the best thing to do, here’s this comment from Mary Beth:
Assuming you live until average life expectancy, it’s actuarially the same no matter when you claim.
So there you have it. On average, you’ll get the same amount no matter what you decide.
At least that’s how it was at one point. I’m not sure the system updates itself regularly for things like longer life expectancies and so on.
And, of course, any particular situation will differ from average, but knowing that the odds are we will receive the same amount no matter what we do gives us some reassurance and gets us out of endless analysis paralysis.
And before we move on let me note the key post about the difference between SS retirement benefits and survivor benefits. These are two different things and you need to consider both as you plan what to take and when.
Claim Early and Invest It
Next Christine asks about a strategy I’ve heard discussed often:
One thing I sometimes hear from avid investors is that they can out-earn the increased payout from delaying Social Security if they make an early Social Security claim and then invest those funds in the market. What do you say to that?
FYI, I covered this idea in A Case for Claiming Social Security Early in case you’d like to dive deeper into it.
Here’s Mary Beth’s response:
They might, depending on the year. You might get a 30% return, or you might lose 30%. It’s only fair to compare the concept of delaying Social Security to investing in a risk-free investment like a CD (certificate of deposit) or a bank account.
Over the past ten years, you were getting 0% on that bank account, and the government’s offering you 8% a year for delaying. Now interest rates are creeping up; as were having this conversation in 2023, you could get a CD for 4-5% or even 5%. Given that, some people might be more comfortable taking Social Security and putting the money in a CD for 5%. Yes, it’s less than the 8% you pick up by delaying. But you’ve got that bird in hand.
Putting the money in the stock market, on the other hand, is very iffy. If you’re feeling lucky, that’s great. You might really increase your returns, but you have to be prepared to lose it as well. For many Americans, particularly for those who don’t have pensions, this is the only source of lifetime income they have, and it’s cost-of-living adjusted. Even if you’re buying an annuity, in most cases that is not cost-of-living adjusted. There’s a whole lot to be said for guaranteed, cost-of-living adjusted income for the rest of your life, no matter how long you live.
Personally, I’m way past the point of trying to maximize everything in my financial life.
If I wanted to maximize it, I would have not given the money to SS in the first place. Hahaha.
Did I even “give” the money? Or was it “taken”? lol
Anyway, we’ll be waiting at least until full retirement age to claim SS — maybe waiting all the way to 70. Time will tell.
I do like the cost of living adjustments as well as guaranteed 8% returns, so we’ll likely stick with those. I’m not going to claim early and then hope the market outperforms what I’d get otherwise. That seems like rolling the dice, something I don’t like to do with our money.
Besides, we’re looking at it more as an insurance policy — to be a backup of a backup plan…not the main plan.
Trying to Calculate Break Even
Finally, here’s one final comment from Mary Beth:
The Social Security Administration used to include a breakeven analysis calculator on their website. Researchers found that when people used this calculator they were more likely to claim early, thinking, “I’ll never live that long. I’m going to grab it while I can.” Social Security no longer has that tool on their website because they felt it was detrimental.
Hahaha. Americans are so strange when it comes to money. lol.
The government tried to help them out and it drove them into a panic.
Is anyone surprised? Ha!
Final Points
Christine ends this chapter with a few final points:
Delaying filing for Social Security is a great way to enlarge lifetime income. It can be particularly valuable for people who think they will have a longer-than-average life or who have a younger spouse who will benefit from that larger benefit over their own lifetimes.
I think my wife will easily outlive the averages…not sure I will or not. But she eats so well, exercises, etc. that I’d be shocked if she doesn’t make it to 90.
Yet another reason for us to delay.
There are situations when filing earlier may make sense, though — if you need the money, of course, or if you’re in ill health and don’t expect to live to your normal life expectancy (both noted above.)
This will be some people, for sure. Though many who don’t expect to live to normal life expectancy will actually live past it.
The financial health of the Social Security system may necessitate changes to the program down the line — for example, means testing or full taxation of Social Security benefits. Such changes are unlikely to affect today’s pre-retirees and retirees, however.
It’s a mess and congress likely won’t step in until there’s no other choice.
We’re so close to the finish line that I doubt our benefits will be affected, but if they are I’m sure we’ll survive. Hahaha.
If you want more thoughts on taking SS, here are some posts I’ve written:
As you can probably tell, this wasn’t my favorite chapter. But it’s a necessary one and I’m glad they included it in the book.
That’s it for this time.
Stay tuned as there’s much more to follow!
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As I said above, I’m giving away a copy of How to Retire on every post I do about the book. Here’s how to you can enter:
- Leave a comment below telling me what you liked best about this post, what you think you can use, or something you learned from it. Basically just share anything meaningful related to the content above (note: “please enter me to win” and similar comments will not be considered out of pure weakness! At least put a bit of effort into it!) This should be fun!
- Be sure to leave your email address when you leave the comment so I will know how to reach you if you win (the email address will not be visible to anyone other than me).
- The winners will be selected by me at random a few days after this post goes live. I’ll announce who wins in my own comment.
- I’ll email the winner, get their address, and send them a book from Amazon.
As with most giveaways, there are rules. Here they are.
Good luck!!!!
