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Why delaying Social Security may not be the best choice

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Terri and her husband Dave, clients of mine who did not want their last names used, were surprised when I told them only one of them should delay filing for social Security retirement benefits until age 70.

They had done their research, reading diligently and attending a seminar on Social Security strategies and planning. They learned about the significant value of delaying filing for benefits and could certainly afford to delay. The only problem was delaying filing was not their best choice.

Historically, the majority of people claimed Social Security at 62 — the earliest possible age. As recently as 1996, 56% of men and 63% of women turning 62 claimed benefits in that year, according to a Boston College Center for Retirement Research report.

An increase in education and public outreach by financial professionals and publications such as this one has helped the public better understand the features of Social Security — especially the importance of delaying filing past age 62. As of 2013, 36% of men and 40% of women turning 62 in 2013 claimed Social Security, a clear improvement from 1996.

There are a number of important reasons to delay filing for benefits. Total lifetime benefits are dramatically enhanced. Monthly benefits increase by approximately 8% for every year one delays filing between the ages of 62 and 70.

Additionally, delaying can provide a surviving spouse with much needed benefits. Maximized benefits can be crucial during the often financially and emotionally tumultuous situation following the death of a spouse.

Finally, there is the issue of longevity risk, or the financial risks associated with living a long life. This is widely recognized as one of the greatest challenges facing older adults.

Even though Social Security has cost of living increases, many commentators believe that these adjustments do not accurately reflect the true rising costs for older adults — especially for healthcare.

Delaying filing can dramatically enhance benefits. This can be especially important the older a client gets: the enhancements can provide a bulwark against the compounding effect of inflation as it continues to eat into buying power.

However, there are situations where delaying benefits is neither feasible nor prudent.

Poor health is one of them. If a client is in compromised health or has a family history of relatively short lifespans, then delaying probably does not make sense. In these situations, a person is not likely to live long enough to experience the benefit of delaying filing for benefits and will actually collect greater lifetime benefits by claiming early.

Financial need is another. If other sources of income are simply inadequate to make ends meet, then, of course filing for benefits as soon as possible makes sense.

A less obvious reason for not delaying benefits, and perhaps more common one that advisers encounter, is a case like that for a couple like Terri and Dave. They were both 66-years-old with full work histories. Dave was the higher wage earner. They could afford for both of them to delay filing until age 70 and then each collect their maximum possible benefits. They were prepared to do so.

Because they both were born before Jan 1, 1954, they retained the option to use a strategy called “restricted filing.” This meant as the lower wage earner, Terri could file for benefits immediately at her full retirement age of 66 while Dave could restrict his filing to ‘spousal benefits’ at the same time. By restricting his filing, Dave could collect a spousal benefit while simultaneously delaying filing for his own benefit, allowing it to grow till age 70.

This strategy would give them a total household benefit of Terri’s full benefit plus Dave’s spousal benefit, or 50% of Terri’s benefit. For the four years between the ages of 66 and 70, they would collect one and half times Terri’s full benefit. To complete the strategy, at age 70, Dave would switch to his own maximum benefit based on his own work history.

If they both delayed filing until their 70th birthdays, their individual annual benefits would be the highest possible. In their case, however, the cumulative benefits of those four years of collecting both benefits from age 66 – 70 outweighed the extra lifetime income that Terri would have collected had she delayed filing until age 70.

This outcome is not necessarily intuitively obvious and surprised the clients. This outcome will not always be the case, however. Difference in ages between spouses as well as the differences in lifetime earnings can complicate the comparisons. This is why advisers should use some type of calculator to compare the options.

As younger retirees (born after Jan. 1, 1954) continue to come into the system, the ‘restricted filing’ strategy will eventually fade away. This will diminish, but not eliminate, the potential to benefit from one spouse claiming an earlier benefit.

It’s best not to assume what the best Social Security claiming strategy is for clients. Run the numbers, explore their specific expense needs, health issues and other factors and help clients make the best choice.

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