September 13, 2012
It Pays More Than Ever To Delay
Single people can receive tens of thousands more from Social Security over many years of retirement and couples can receive nearly $125,000 more by waiting until their late 60s to sign up.
The most common age for starting up Social Security is 62, when individuals first become eligible, even though monthly benefit checks would rise sharply if they’d wait. But it’s becoming increasingly worthwhile financially to hold out, according to economist Sita Nataraj Slavov of the American Enterprise Institute, who presented her research findings at the Retirement Research Conference in Washington last month.
This contradicts the conventional wisdom that no matter when people file, they’re going to essentially receive the same total amount over their entire retirement. The trade-off has always been between filing early and receiving a smaller check for a longer period of time, or filing later and receiving a bigger check for fewer years. Financially, it’s a wash.
But an economic fluke has changed all that: historically low interest rates. Slavov and co-author John Shoven, a Stanford University economist, have determined that, increasingly, there’s a payoff to holding out in this unusual rate environment. (More later on how that works.)
“There’s real money at stake here. This is not a trivial amount for most people,” Slavov said in a telephone interview. “What we’re trying to communicate is, it’d be good to think more about what you’re giving up when you claim early.”
At Squared Away’s request, Slavov calculated the present values for retirees who file for Social Security at the age at which they would maximize their benefits – she did so for the average single man, single woman, and two-earner couple. The payoff is largest for married couples who delay filing for benefits:
- The single man will receive the maximum total benefit if he signs up for Social Security at age 69. He would receive $38,679 more income – total benefits over his entire retirement period – than he would by claiming at 62.
- The single woman, who tends to live longer, can maximize her benefit by waiting until age 70; she will receive $58,668 more during retirement.
- The two-earner couple gains the most if the husband starts his benefits at age 70 and the wife claims a spousal benefit – based on her husband’s earnings – at age 66 and then, at age 70, claims the benefit from her own employment. Doing so would generate $124,342 more income than if both spouses had claimed Social Security at age 62.
Research shows that many people don’t put a lot of thought into when they’ll retire. But this decision is a critical one for middle-class and poor Americans. It’s also not easy for most people to figure out how much more they can get.
The explanation for why it pays to delay has to do with the value of a dollar today, compared with its value next year. When interest rates are high, most people would prefer to receive one dollar today on the assumption that it is worth more than a single dollar received next year. The dollar in hand could be invested, earning money and increasing in value during that time.
But with inflation-adjusted rates currently running at 0 percent – as Shoven and Slavov assumed in their estimates – the dollar next year is worth roughly what it is today. In short, it pays to delay and collect the larger check later, because every dollar in that check has held its value.
To read a related paper by Slavov and Shoven, click here.
Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.