Introducing the Social Security Claiming Decision
For the vast majority of Americans, Social Security benefits serve as the core of a retirement income strategy. As a government-backed, inflation-adjusted monthly income for life, Social Security benefits help to manage longevity risk, inflation risk, and market risk. But we all have a decision that we will need to make. We’ll need to decide when we will start taking these benefits. And what we decide will have serious ramifications for what our retirement will look like.
In 2014, the Social Security Administration reported that the average monthly Social Security retirement benefit was $1,244 per month, or $14,928 per year. If you’re a couple with both spouses earning average wages you can expect $29,856 per year for your household. If one spouse doesn’t work and the other has average earnings, your combined benefits would be $22,392 per year.
Individuals with above average lifetime earnings will be entitled to even larger benefits. However, the average benefit is significantly less than what is possible, as most Americans claim benefits early.
Social Security’s online calculator shows that if you are 66 today (the full retirement age) and already retired, you’ve earned the maximum taxable earnings over your career, and you’ll delay benefits until age 70, you will be entitled to $3,507 per month in today’s dollars, or $42,067 per year.
If your spouse is eligible to half of this amount (which they typically would be if they’re career earnings are lower than yours), you’ll receive $63,130 per year from Social Security. If we extend this over a 20 year retirement, that is $1.26 million of real spending power.
To the extent that wages will grow faster than prices, current Social Security legislation supports increased benefits for wage earners born at later dates. And it is also important to remember that benefits will grow with inflation throughout retirement.
Your Social Security benefits are a significant retirement asset, worth more than $1 million of lifetime benefits for many readers. The present value of Social Security benefits at retirement, which can total hundreds of thousands or even millions of dollars, joins home equity as the two largest assets available for most American retirees, easily dwarfing the value of their investment portfolios.
For many lower- and middle-income Americans, Social Security may end up providing the vast majority of retirement income. The Center for Retirement Research at Boston College notes an interesting statistic that Social Security provides 70% of the income for 70% of households aged 80 or over.
For higher lifetime earners and savers, the relative importance of Social Security will be lower. Nonetheless, if you experience a sufficiently long retirement, total Security Security income could easily exceed $1 million, and optimal Social Security claiming decisions could end up supporting more than $100,000 of additional retirement income, relative to less effective claiming choices. Just understanding how to strategize on spousal benefits may net an extra $50,000 of income that might otherwise be missed.
The Social Security claiming decision is an independent, separate from when you decide to quit working and retire. Claiming decisions should not be taken lightly. You may get more from Social Security than another retiree simply by knowing how the system works.
Case workers at Social Security offices may not know about, or be allowed to provide advice about sophisticated claiming strategies, as they generally assume that the reason for visiting them is because you want your benefits to start sooner rather than later.
Social Security claiming strategies involve deciding when to claim retirement benefits. Those benefits can be claimed starting at age 62, and additional credits are available if you delay your benefits up until age 70.
There is no reward provided for delaying beyond age 70. For a single person, the claiming decision is a matter of picking the start date for benefits. The decision is more complicated for couples, though, as each of you must consider when to claim your own benefit, when to claim your spousal benefit, and when your spouse should claim their spousal benefit.
Potential survivor benefits, as well as any potential benefits for dependents, must also be factored in to decisions as well.