For most retirees, Social Security is an essential component of financial security. It is estimated that Social Security benefits account for one-third of all retirement income each year. Despite its significance, it appears that many retirees are not optimizing their benefits and losing out on substantial income over their lifetimes.
The Social Security claiming options are complex and there is no one strategy that is the right fit for everyone; however, one of the common errors is claiming too early. Only 4% of retirees wait until age 70 to claim the maximum retirement benefit. A recent study estimates that US retirees would generate an additional $111,000 of income on average over their retirement years if they optimized their Social Security benefit selection.
Many factors may influence the decision to claim early, with poor health and a reduced life expectancy being the most common. There is a break-even life expectancy calculation that is important to consider: how long must I live before the maximized age 70 Social Security benefits in total exceed the lower benefits I could have received earlier. For most individuals, it is around age 79. It is important to remember that life expectancy averages are exactly that: they reflect the average of all individuals at all ages. If someone reaches age 70, their life expectancy is now considerably higher than the averages.
However, research indicates that a significant portion of the poor decision-making is caused by a lack of understanding of the claiming options and how they can be integrated into a comprehensive retirement strategy. For some individuals, the best strategy is to delay and optimize benefits by working longer if possible. Other individuals may be able to delay by taking more income from their savings early in retirement, while waiting for age 70 to claim the maximum Social Security benefit. They could then reduce the withdrawals from their investments when their Social Security benefits begin at age 70.
In reality, the decision-making should take into consideration all the financial factors that make up your life and how they interact with one another:
- All the available Social Security claiming options at all ages (including the special rules for surviving spouses, divorcees and those born before 1954).
- Life expectancy and health.
- Size of investment portfolio.
- Required Minimum Distributions (RMDs).
- Tax implications.
- Your retirement lifestyle and your intentions to leave assets to heirs.
The common thread is good planning. With so much on the line, it makes sense to engage in a comprehensive, objective retirement planning process that considers all the unique aspects of your financial life and creates the best strategy to maximize your options. With today’s financial planning technology tools, an individual can model the various alternatives and select the right strategy.
We provide this service to all of our clients because we know how big of a difference it can make. Our process incorporates all the aspects of your unique financial situation to determine the optimal Social Security claiming strategy so you can retire with confidence.
Winfred Jacob, CFP®
Senior Financial Advisor