Social Security: It’s All in the Details, Boomers

Deciding when to start receiving Social Security benefits is one of the most critical decisions a retiree can make.

Continue Reading Below

As most folks know, the age at which you are eligible to receive 100% of your benefit, (a.k.a. your “full” or “normal” retirement date), has been increased to 66.(1)  However, the earliest date at which you can begin collecting Social Security remains the month you turn 62.

For numerous reasons, most of them emotional, illogical or uninformed, this is still the age at which more than 40% of retirees choose to begin benefits. If you are claiming Social Security based on your own work record (as opposed to that of a spouse), starting at age 62 means your check will be 25% smaller than if you had waited until age 66. This impact is permanent. Moreover, if you are married, it means your surviving spouse will also receive a much smaller benefit.

On the other hand, for each year beyond age 66 that you postpone the start of Social Security, the government increases your check by 8% plus each year’s cost-of-living-increase (COLA) up until you reach age 70. At that point, no additional adjustments are made, so delaying further has no advantage.

If you assume an annual inflation rate of 3%, postponing the start of Social Security until age 70 means that your benefit will increase by 11% compounded over four years. The result of waiting is a monthly benefit that is more than a 50% larger than it would have been at age 66.

For instance, let’s say you would be entitled to a benefit of $1,000 per month at age 66.  Here’s how the math works out under the above assumptions:

Social Security is fairly straight-forward when you only have yourself to consider. It’s when a spouse is involved- especially if she/he has their own work history- that things quickly become complicated. However, this is also when there are opportunities to get creative- if you understand the rules.

First, let me say that I’m not advocating that everyone wait until age 70 to begin collecting Social Security. I understand there are legitimate reasons--such as needing the income--that influence when you apply. However, with so many two-income baby boomer couples heading into retirement, an increasingly common decision involves when one or both individuals should start benefits. Here are a few things to keep in mind:

-Either husband[H] or wife [W] can claim a “spousal” benefit based on the earnings of their marriage partner. (The federal government does not recognize same-sex marriages.)

-If still married to this individual, you cannot claim a spousal benefit until your spouse him/herself files for Social Security.

-Whether you are claiming based on your own work history or that of your spouse (i.e. a “spousal” benefit), the check you receive will be reduced if you begin receiving payments prior to your full/normal retirement age. (The age of your spouse is not a factor.)

-You can collect as a spouse and then switch to your own benefit.

Let’s say [H] was a high school teacher and [W] was a corporate attorney who earned considerable more money. He’s 66 and she’s 65 and they have other sources of income and wish to take advantage of the guaranteed benefit increase available by postponing Social Security until age 70.

Since (W)’s benefit will be considerably higher, they’ll get the biggest benefit if she is the one who delays. (H) applies for Social Security and receives his full benefit because he is age 66.  A year later (when she’s 66), (W) applies for a benefit based on his earnings, i.e. a spousal benefit.

Four years later when [W] IS 70, she applies for Social Security based on her own earnings record and receives a monthly check that is 50% larger than it would have been at age 66 (assuming an annual COLA of 3%).

P.S. Last December Social Security shut down the “borrow now re-pay later” scheme some advocated.  This involved applying for Social Security benefits as soon as possible, investing the proceeds and then re-paying all of the money you received.  This enabled you to re-file and claim a higher benefit at, say, age 66 or 70.  The goal was to essentially use the interest-free “loan” you got from the government to reap a tidy profit in the financial markets. The new rule gives you just 12 months to change your mind once you pull the trigger to start benefits. And it’s limited to one time per person.

1. Starting with those born in 1955, the normal retirement age begins to increase until it reaches age 67 for individuals born in 1960.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.