Terry Savage: Social Security fact and fiction
Social Security decisions are among the most complex and fateful choices seniors must make.
The most critical decision revolves around when to take your benefit: as early as age 62, which will reduce your monthly benefit; at full retirement age (or FRA, around 68 now); or sometime between FRA and age 70, when you must start taking your benefit.
Then throw in a “double decision” factor as spouses decide whose benefits should be taken first — and the impact of those decisions on the benefits awarded to a surviving spouse — and I promise you there’s a minimal chance that you’ll get it right. The wrong decision will be costly.
While I’ve written about these decisions before, the National Bureau of Economic Research just published a paper that puts numbers around the potential costs of making a wrong decision. The research paper, “How Much Lifetime Social Security Benefits Are Americans Leaving On the Table?” gives a shocking answer: “Optimizing the claiming decision would produce a 10.4% increase in the typical worker's lifetime spending capacity.”
Or put it another way, the research says that for workers currently between the ages of 45 and 62, their “sub-optimal claiming decisions" (i.e., claiming too soon) will cost them in excess of $180,000 in the present value of household lifetime discretionary spending.
One of the authors of the study, famed economist Laurence Kotlikoff (who is also the author of the best-selling "Get What's Yours: The Secrets to Maxing Out Your Social Security"), has been trying to get this message across for years. Now this study quantifies the true cost of the claiming errors.
When to claim Social Security is not a decision to be made based on emotion, such as worrying that you’d better get the money now while you can! It is not about a bet against your longevity or the full funding of Social Security. Instead, it is a multidimensional financial calculation that requires sound advice — especially if you are part of a two-income couple.
The basic rule is to wait as long as you can to claim your benefits. It’s that simple: Don’t claim early!
Claiming before your FRA permanently reduces your basic benefit. For example, if your birthday is 1960 or later, your FRA is 67. If you start taking your benefit early at age 62, a $1,000 benefit would be cut to $700 — a 30% benefit reduction that lasts your lifetime!
Why wait until 70 to claim? For every year you delay you’ll see a roughly an 8% a year increase in basic benefits (plus additional cost-of-living increases in the interim) until you must claim at age 70. That larger base check means much larger dollar amounts for future COLA increases.