The Social Security Benefits Puzzle

As seen in the Concord Journal in August 2012
By Lee C. McGowan, CFP^®

When should you apply for Social Security retirement benefits?It’s a seemingly simple question, but with many moving parts; the solution for one person may not be the best answer for another. Is there a simple answer? How are other people solving this puzzle?

The Dilemma – When to Begin?

If you meet Social Security eligibility requirements, you may begin receiving benefits as early as age 62. The general advice used to say a bird in the hand is worth two in the bush; take Social Security now and don’t bother with the attempting to determine if it’s more optimal to begin benefits at a later date. What’s the catch?If you begin taking benefits at age 62, then your benefits will be reduced by up to 25%. Additionally, if your spouse will rely on your benefits, applying early will have an impact on how much he or she receives based on your work record (not to mention, spousal death benefits will be reduced significantly).

Today, many financial planners, research papers and academics are discussing the benefits of waiting until age 70 to apply for benefits. If you apply for benefits after age 62, your benefits will increase(depending on your year of birth) each month until you reach age 70 – up to 8% annually.

But, of course, the best option for collecting benefits may not be at age 62 and it may not be at age 70. The best time to collect Social Security benefits is likely based on your personal income needs and objectives. So what are other people doing?

Theory and Evidence

A recent working paper from the National Bureau of Economic Research(NBER No. 17866, February 2012) looked at when people should begin collecting Social Security benefits and whether the actual decisions people make match with what the theory says they should do. Researchers found that while many people should wait to begin Social Security benefits, relatively few are making decisions based on the most important variables.

Key Variables to Consider

According to the NBER study, current interest rates are a critical variable in the determination of when people should take Social Security. When interest rates are low, the benefit from receiving higher benefit payments down the road is greater that the value of receiving the income now. The study also finds that your family situation and whether you are male or female are important factors.

The current level of interest rates, according to the study, would indicate that unmarried retirees should delay taking Social Security if possible, although men shouldn't wait until age 70,due to their shorter life expectancy. However, married retirees have a more difficult decision as one spouse may get payments based on the other spouse's work history. In general, for one-income families, interest rates have to be very high in order for it to make sense to take benefits sooner than later. In two-earner families, the person with the higher income should usually wait, while the lower-income spouse should take spousal benefits at normal retirement age.

The Real World

As helpful and interesting as various research pieces may be people generally don’t look at Social Security start dates as a black or white decision. The NBER study found a positive correlation betweenretirees with higher levels of education and postponement of benefits. In other words, retirees with higher levels of education generally waited to receive payments, but that was often due to other sources of income/assets available to them and the lack of need to receive the benefits.

Also, according to the study, work status has made an impact on the Social Security decision. It was found that greater than 75% of early retirees began benefits at age 62, despite evidence that may suggests delaying benefits may be advantageous.

What You Should Do

The NBER study, as well as many other studies, does not give specific advice, but rather give general guidelines. In particular, with the research based on actuarial statistics, it doesn't take into account any personal health issues you may have. In general, the longer you expect to live, the more it makes sense to wait.

As complicated as this question is, the key takeaway is to remember that taking Social Security isn't something you should decide on a whim. If you consider carefully all the trade-offs involved, you can make a decision that could mean thousands of extra dollars for you and your family.

Consider Social Security planning: Understand the rules and nuances of Social Security. If you don’t have the time or patience to learn them, work with an expert to help you decide your best personal strategy. It may be best for one spouse to collect and one to wait, both spouses to wait, or to collect as early as possible. There is no one right answer for everyone. Your individual situation must be reviewed to determine the best course of action for you.