The Rational Investor: When Should I Claim Social Security?

By Bruce Smith | October 23, 2017

When will you start claiming social security? For most Americans, the answer is "as soon as I can..." but that choice may cost them thousands of dollars per year in retirement income. 

Bruce Smith is a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyResearch from the U.S. Government Accountability Office indicates that most workers claim Social Security at the earliest possible age, 62 years. But while it may be tempting, claiming at this early stage locks in a reduced benefit rate for the rest of your retirement.... which translates into a significant amount over time. 

Here are questions retirement planning advisors recommend asking before making this important decision, so you can avoid this common Social Security pitfall. 


Retirement Planning Advisors Share Numbers You Need to Know

Workers can start claiming Social Security benefits from age 62 to age 70. In between, there's an important milestone known as "full retirement age;" depending on the year you were born, full retirement age will be:

  • 1937 and earlier: 65
  • 1938-1942: 65 + one month per year
  • 1943-1954: 66
  • 1955-1959: 66 + one month per year
  • 1960 and later: 67

If you start taking benefits early, you'll receive from 25 to 30 percent less than if you wait until "full retirement" age, depending on the number of months left before you reach full retirement age. Wait to start claiming benefits at full retirement age, and you'll receive the full Social Security benefit.

There's another piece to this Social Security puzzle, however: If you wait longer than full retirement age to claim benefits, you'll receive an even higher amount. In fact, if you file as a single person at age 70, your benefit amount may be as much as 76 percent higher than had you taken benefits starting at age 62.

How Social Security Planning Fits in Your Financial Planning Process

Bruce Smith is a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountySome worry that waiting until age 70 to claim Social Security presents too large of a risk; after all, what if you pass away before you have the chance to claim those additional benefits? Research indicates that given average life spans — 84.3 for men, 86.6 for women — waiting to claim makes more financial sense.

Multiple studies indicate that this general rule holds true even for those with statistically shorter life spans, such as individuals without high school diplomas or pre-existing medical issues.

For certain demographics, such as married couples in which one spouse is the primary earner, waiting longer to claim benefits pays out even more. In such cases, primary breadwinners receive greater benefits throughout the rest of retirement and, if they pass away first, those higher benefits pass on to the surviving spouse, too.

Why do so many people choose to take Social Security early, rather than waiting for full retirement age (or beyond) and using their savings? A 2015 study shows that around 30 percent of those who claim Social Security benefits early actually have enough savings in their Individual Retirement Accounts or 401(k)s to compensate for two years of Social Security payments — and about 25 percent had enough in IRAs to cover four years. In a perfect world, retirees would tap into their IRAs first, for several reasons:

  • Returns from delaying Social Security are a sure thing, at about 8 percent per year you wait until age 70
  • Delayed Social Security returns are immune to inflation
  • In contrast, IRA funds aren't guaranteed to grow and aren't immune to inflation

Some who choose to claim Social Security rather than use IRA funds may do so because they want to pass their IRA savings along to their heirs, or because they're worried about their health. These cases may warrant early filing, as every situation is different. As a general rule, however, most retirees will get more from Social Security if they wait to claim benefits. Speak to your retirement investment advisor to determine which financial strategy is best for your individual needs and goals. 

Posted in Retirement Planning