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Sooner or later: What's the best time to claim Social Security?

Rochester Business Journal
September 28, 2012

One of the questions I am asked most frequently by clients approaching retirement is "When should I start taking Social Security?" While it is tempting to begin claiming benefits the moment you are eligible (age 62), that may not be the best answer in your circumstances. Before I explain why, let us take a look at the basics.

Social Security benefits are essentially guaranteed income that is periodically adjusted for inflation. They are free of investment risk in that your payment does not fluctuate based on how the stock market is doing, and you are protected against living too long because you receive a benefit for as long as you live. Additionally, Social Security comes with a death benefit for married individuals.

The amount of your benefit depends upon when you were born, whether you have reached full retirement age (currently 65 to 67) and your total lifetime earnings. Full retirement age is the age at which you receive your full benefit regardless of earned income. For most people this is age 66.

If you claim benefits early, you will receive a benefit reduced by 6.25 percent a year up to 25 percent. Thus, if you claim at 62, your benefit will be reduced by 25 percent from the amount you would receive at age 66 for as long as you collect. Delaying a claim until age 70 results in a benefit increase of 8 percent a year up to 32 percent. Accordingly, claiming at age 70 increases your benefit by 32 percent over claiming at age 66.

What most people do not understand, however, is that claiming early or later does not give you any additional benefit; it merely affects the amount you receive monthly. Benefits are calculated so that you receive the same total benefit as long as you live to your average life expectancy. If you claim early, you receive less per month than if you claim later, but if you die at your life expectancy, the total will be the same. Only if you die before expectancy or after expectancy will total benefits vary.

Several factors need to be considered before deciding when to claim your benefits, including life expectancy, other sources of income and your need to work, as well as your marital status.

If you believe your life expectancy is below average, you should consider taking benefits as soon as possible, since delaying will be detrimental if you pass away sooner than average. Conversely, if longevity runs in your family, delaying claiming benefits will most probably prove beneficial.

If you will still need to work after claiming benefits, delaying taking benefits may make sense. This is because you will lose $1 in benefits for every $2 of earnings over the limit of $1,220 per month or $14,640 per year. Essentially, this creates a temporary 50 percent tax on any earnings above the annual limit until you reach full retirement age, plus the lifetime reduction of up to 25 percent of your benefit. Once you reach full retirement there are no limits on earnings.

In making your decision, it is not just about you if you are married. Assume you can take $1,320 at age 70, instead of $750 at age 62. You will have to live to age 80 and a half to make that decision worthwhile. So maybe you don't think you will live that long and you choose to claim early. But if you are married and claim early, you could be reducing your spouse's benefit as well. If your spouse outlives you by five years in the above example, the survivor benefit would be $45,000 if you claimed at age 62 versus $79,200 if you claim at age 70.

Some people think they can play the investment game and draw benefits early and invest the money so that the gains will offset the benefits of delaying. For each year you delay past your full retirement age, you earn 8 percent per year. That benefit is not only guaranteed but also indexed to inflation. With today's markets being what they are, it is unlikely you will be able to find a similar investment vehicle without taking on substantial additional risk.

For each year you delay, there is a cost equal to the amount of the foregone benefit. If you are entitled to $24,000 a year at age 66, you would be entitled to $25,920 at age 67. Is the extra $1,920 per year for the rest of your life and perhaps your spouse's life better than the $24,000 you gave up? In many circumstances, the answer is yes.

In conclusion, I understand that claiming sooner is appealing under the bird-in-hand theory, and considering the solvency of the system. As you consider when to start taking your Social Security benefits, however, your decision should best fit your situation. If the security of receiving benefits now helps you to sleep better at night, then that might be the right decision for you. This is especially true if you have no other sources of income and cannot afford to delay Social Security benefits.

If you can afford to delay claiming, carefully consider the advantages of that. Make sure you plan not just for your lifetime but for your spouse's as well. A recent report from the Census Bureau highlights a startling fact: The share of the population age 90 or older is projected to quadruple between now and 2050, so living into your tenth decade is something to factor into your planning. Approximately 75 percent of Americans claim Social Security at age 62.

I doubt that is the best strategy for all of them. Give serious thought to your situation to ensure that you have the right strategy.

Frank A. Insero is the CEO of Insero and Company CPAs and Insero Wealth Strategies, a registered investment advisory firm. He can be reached at (585) 454-6996 or

9/28/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

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