It’s the great debate that just about everyone has an opinion on…when should you claim Social Security?
If you claim your benefit too early, you risk short-changing yourself out of money you paid in to the system.
If you claim too late, you’re likely to only get 75 cents for every dollar you paid into the system. Everyone knows the current math on Social Security is unsustainable. This is particularly true for anyone under 40!
Choose wisely when claiming Social Security
You can claim your Social Security benefit as early as age 62. But should you?
Let’s say you have two hypothetical workers with the same earning history, the same income, the same everything — except for one key difference…
One wants to claim early at 62. The other wants to claim at 66 years and two months, in other words at their full retirement age.
Beginning in 2018, people born in 1956 must wait until they are 66 years and 4 months old to receive 100% of their Social Security benefit.
We want to know which person will earn more in total Social Security benefits within a reasonable time frame…
Let’s run some numbers on the two workers
To arrive at the answer to our question, first we need to know what the average monthly payout for a retired worker looks like. In June 2017, it was $1,369 according to the Social Security Administration.
Knowing that, the Motley Fool ran the numbers looking at lifetime payout through age 85. Here’s a chart of the results.
What we see is that the second worker who waits until his or her full retirement age of 66 years and four months before claiming Social Security will surpass the worker who claimed early at 62 in total lifetime benefits at some point between 2034 and 2037.
Now let’s quantify the loss by putting actual numbers to this scenario: The first worker who retired at 62 will have collected some $28,000 less through age 85 than the second worker who waited until full retirement age.
What a difference just four years — waiting from 62 to 66-ish — makes!
The point at which the second worker surpasses the first worker in total lifetime benefits happens about 20 years down the road in this hypothetical situation. So if you expect to be around a long time, you may want to take this advice to heart.
Here’s how the math works
The second worker is getting a bigger, fatter monthly check than the first worker.
That’s because for every year you can delay taking Social Security beyond age 62, you’ll get an imputed return of roughly 8% annually on your lifetime benefit.
In plain English, that means if you wait until 63 to take Social Security, then your monthly checks will be 8% bigger than if you claimed your benefit at 62.
Wait until 64 and those checks will be 8% bigger than they would have been if you quit working at 63.
And so on and so on…
Now let’s shift the equation
It’s usually a better idea to wait until full retirement age before claiming Social Security benefits. You can check the Social Security Administration chart below for your full retirement age by year of birth.
And furthermore, you might consider pushing retirement out a bit beyond full retirement age and working through age 70 if it makes sense for your life.
If you can hang at your job through 70, that’s how you’ll get the biggest possible monthly check that you’re entitled to. (Working past age 70 does not add any extra money to your monthly payout.)
Possible exceptions to this rule of claiming later rather than earlier are if you’re in poor health, have excessive debt or have no future job prospects.
If that describes your situation, then you’ll probably want to access the money you paid into Social Security as soon as you can get your hands on it!
Still convinced you want Social Security as soon as possible?
Maybe you’re worried about Social Security running out sooner than expected. According to recent projections, the program’s trust fund is slated to run out of money in 2034 if no changes are made to the existing system.
But things can change and maybe those numbers are overly optimistic. If that’s your fear, you may want to consider longevity insurance or an immediate lifetime annuity.
This is a simple insurance product you buy that doesn’t start paying a living benefit until you hit 85.
The idea is that with a longevity policy in place, you could plan to blow through all the cash in your life through age 84. Because the minute you turn 85, you get a check every month for as long as you live.
Insurers offer a great benefit on longevity policies. They know from actuarial tables that most people who buy the policy won’t live to receive any money. But if you do live to age 85, you get that nice monthly check.
You won’t hear a lot of insurance agents talk about longevity policies because the commissions on them are so small. But they can be a great idea for so many situations where people might otherwise outlive their money.
If you want to explore the idea of buying a policy, ask the agent for “the insurance policy that doesn’t pay any money until age 85.” Different people call it different things, but they’ll know what you mean based on that description.
When you retire, you may not have enough money to provide for your monthly needs from savings. So there are companies that turn a supply of money — you typically need a minimum of $100,000 — into a lifetime stream of income.
Immediate payout annuities (aka life annuities) are entirely legitimate, but they have so little in the way of commissions that they’re never pushed by salespeople.
Make sure you stick with an insurer who is rated A++ by A.M. Best. An A++ rating indicates the utmost financial strength and that the insurer will be there for the long haul.
Here’s a common concern about immediate annuities: What if you pour all your money into an immediate payout annuity and then you die shortly after? It’s true that all the money will be gone and there will be none for your heirs.
If that’s your concern, then you can opt for a special provision called ‘period certain,’ which means that you’ll get a guaranteed payout (typically for 20 years) even in the event of your death. Your monthly benefit will drop by about 10% if you take the period certain option, but at least it provides something guaranteed to your heirs.