A recent survey of Americans who have yet to retire found that just 10% have made plans to receive the biggest possible Social Security payout.
And it’s not because people don’t know that Social Security pays bigger benefits the longer you wait to claim. More than 90% of participants in the Schroders survey said they are well aware that if they wait until age 70 to start claiming they will receive the biggest possible monthly payment. A benefit that starts at age 70 is 76% higher than if you start receiving your payout at age 62.
What seems to be gnawing most at near-retirees is a fear that the Social Security program is going to run out of money and stop making payments.
Okay now, I share everyone’s concern and frustration that Congress has yet to take steps to put Social Security on firmer financial footing. But I want to be clear: payments will not stop. And it is highly, highly unlikely that any changes to the program will impact anyone at least 55 today.
Let’s separate fear from fact:
Fact 1: Beginning in 2034 Social Security will not be collecting enough money from current workers to pay out 100% of the benefits owed to retirees. If that were to happen, payments would not stop completely. The worst-case scenario is that earned benefits would need to be cut by around 25% to deal with the cash shortfall. Now I am not suggesting a payout of just 75% is acceptable, but 75% is a lot more than zero. So let’s keep that in mind.
Fact 2: Social Security had a similar problem forty years ago and fixed it without impacting near-retirees. Yep, in 1983 major changes to Social Security were made to deal with a financial shortfall. One of the biggest changes made back then was to gradually raise the full retirement age—when you are entitled to 100% of your benefit—from 65 to 67. But that change was only made for people who were younger than 43 at the time. The new rule didn’t apply to people in their late 40s, 50s or 60s. There is no reason to expect that the needed changes this go-around would hit near-retirees.
Fact 3: If you are in decent health, there is no better financial move to consider than waiting as long as possible to claim your Social Security benefit. A 65-year-old, non-smoking woman in average health today has a 50% probability she will still be alive at age 88. For a male, it is age 85. A Social Security payout that will be 76% higher if you wait until age 70 to start can be awfully helpful if you indeed have a longer life. (For those of you stuck on the notion of a “break-even” point where total payouts from waiting will be more than what you collected if you started at age 62, it’s around age 81. That is, if you start at 70, by age 81 you will have collected more from Social Security than if you had started receiving a reduced benefit at age 62.)
Fact 4: It’s most important for the highest earner to delay starting as long as possible. For married couples, it’s so important to realize that when one spouse dies, the surviving spouse is only entitled to one benefit: her own, or the benefit of the deceased spouse. At a minimum, I would strongly encourage married couples to consider a strategy that allows the highest earner to wait to start Social Security until age 70. That ensures that the surviving spouse will have the largest possible benefit. It’s less important when the other spouse chooses to start payment.
Fact 5: It’s not an either/or of 62 or 70. You can claim any time between age 62 and age 70. And every month that you delay earns you a slightly higher payout. Your Full Retirement Age (FRA) is when your payout is 100% of your entitled benefit. For anyone born in 1960 or later, your FRA is 67. If you claim before 67 you will get less than 100%, but claiming at say, 66 and five months is going to get you close to 100%, whereas claiming at 62 will entitle you to 70% of your FRA benefit.
The key takeaway I want you to understand is that every month you wait will pay off. If waiting until 70 seems too daunting, why not reframe this as an annual choice? At 62 choose to wait. Then ask yourself at 63 if you want to wait until 64. Keep doing this, and you may find it much easier to see how you can afford to wait another year and another year…
And this doesn’t mean you need to keep working a full-time job. Part-time work, and maybe beginning to tap some of your retirement savings can enable you to be patient and wait past your early 60s to start collecting Social Security.