For seniors, patience may pay off. They can start Social Security retirement benefits as early as age 62 or as late as age 70.
"Waiting until 70 generally is preferred, when feasible, because Social Security benefits currently increase by approximately 8% per year for every year deferred," says Christopher Parr, CEO and president of Parr Financial Solutions, a fee-only planning firm in Columbia, Md.
Currently, 66 is full retirement age (FRA) for Social Security, but it increases gradually until reaching 67 for clients born in 1960 or later. Starting early generates a permanent reduction in benefits, up to 25%.
If Joan Rogers, born in 1954, would be entitled to a $2,000 monthly Social Security benefit at 66, she'd get only $1,500 a month by starting at 62. Thus, waiting from 62 to 66 increases Joan's basic lifetime benefit by 33.3% (from $1,500 to $2,000 a month) in four years, or roughly 8% a year.
"People also receive 8% simple annual increases from age 66 to age 70 for delaying the start date," says Marilyn Capelli Dimitroff, director of wealth management and principal at Bloomfield Hills, Mich.-based Planning Alternatives, a wealth advisory firm. In our example, Joan's monthly benefit would increase to $2,640 by postponing Social Security as long as possible. Altogether, by waiting from 62 to 70, Joan increases her monthly benefit by 76%, from $1,500 to $2,640 a month.
TALLYING THE TRADEOFF
That federally-backed increase may be attractive but there is a cost. By waiting from 62 until 70 to collect maximum Social Security benefits, Joan gives up 8 years of $1,500 monthly checks, not counting cost-of-living adjustments. Various calculations typically put the break-even point in the late 70s or early 80s.
Given the math, when should people delay Social Security until age 70? "Waiting until then makes sense for single people who are healthy and have sufficient non-Social Security resources," says Dimitroff. "Starting at age 70 maximizes the benefit for someone with longer than average longevity."
For married clients, claiming at 70 often is a good choice for at least one spouse, according to Dimitroff. The increased benefit can act as a form of supplementary life insurance because the surviving spouse will receive the larger of their two benefits.
Parr says that 70 is the most common starting age among his clients, who tend to have substantial savings. They typically have enough cash flow (from work or investments) that they can wait for the maximum benefits. "Cash flow is king," he concludes.
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
This story is part of a 30-day series on Social Security and retirement income strategies.