Deciding when and how to claim Social Security benefits is one of the most important retirement income decisions that you will ever make. The idea of guaranteed income for life that keeps pace with inflation holds fresh appeal in an era of increased longevity, disappearing pensions, historically low interest rates and erratic stock market returns.
Social Security is the single largest source of income for the majority of Americans 65 and older, representing half or more of the total income for 53 percent of married couples and 74 percent of unmarried individuals, according to the Social Security Administration. An informed decision on how and when to claim Social Security benefits can mean thousands of extra retirement income dollars per year and tens of thousands of dollars over a lifetime.
Deciding when to retire and when to claim Social Security benefits are two separate decisions that don't need to occur at the same time. Claiming Social Security benefits before the normal retirement age – currently 66 for anyone born from 1943 through 1954 – means retirement benefits will be permanently reduced. For example, if your full retirement age is 66 and you claim benefits at 62, those benefits will be reduced by 25 percent for the rest of your life.
For someone whose full retirement age is 66, delaying Social Security benefits until 70 will result in a whopping 32% percent increase in benefits. Do the math. If your full-retirement-age benefit is $2,000 per month at 66 and you wait until 70 to collect, your benefits will be worth $2,640 per month. The actual payout will be even larger, as annual cost-of-living adjustments for each of the intervening years when you did not collect benefits beyond full retirement age will be added to your monthly benefit amount.
Consequently, individuals whose full retirement age is 66 may represent the sweet spot for Social Security claiming strategies. The combination of a guaranteed 8%-per-year increase in benefits for every year that you postpone collecting Social Security benefits beyond full retirement age up to 70 and the comparatively low-interest rates on other risk free investments such as Treasury inflation protected securities yielding less that 1 percent in early 2014 creates a strong argument for waiting to collect Social Security. That assumes that you are healthy and likely to exceed average life expectancy, and have other assets to draw on in the interim.
Of course, this is an individual case by case decision that must be well thought out. Meet with your financial adviser to discuss the various claiming strategies to better understand what would work best for your particular situation.
This article originally appeared on Santa Rosa Press Gazette: Learn ways to maximize Social Security