Retirement: When you should take Social Security
Social Security is most Americans' largest retirement asset, but the system is "maddeningly complex, and if you don't figure it out, you can lose big bucks," says one of the authors of a new book.
"It's easy to leave tens of thousands to hundreds of thousands of dollars on the table," says Laurence Kotlikoff, who wrote Get What's Yours: The Secrets to Maxing Out Your Social Security with Philip Moeller and Paul Solman. "The benefits are there for the taking. You paid for them. And with a little effort, you can dramatically increase what you get."
But most people "are doing the wrong thing, which is immediately taking greatly reduced benefits the instant they become available," he says.
USA TODAY talked to Kotlikoff, a professor of economics at Boston University, about Social Security:
Q: How important is Social Security to most people's financial strategy in retirement?
A: It's really critical for almost all of us to get this 100% right. Simply taking benefits at the earliest possible moment without any strategizing can cost almost everybody a lot of money. People don't understand that there is more than one benefit available to them, and there are different strategies for taking their different benefits.
This is like an investment you have to manage. But we are not told that we have options. I don't think the Social Security Administration has provided enough education to the public about all the options. In our book we have listed 50 secrets to getting higher lifetime benefits, and 25 "gotchas" that can cost you very big bucks. These include complex strategies for married couples, divorcees, widows, disabled workers and people who are thinking about getting married or divorced.
Q: Why did you write this book?
A: The complexity of the Social Security system is disgraceful. People are losing benefits that they paid for because they are not aware of them, and that's not fair. The system is a user's nightmare and, as a consequence, it's terribly unfair. It's also in terrible financial shape. Other economists and I show you how we would fix it at www.thepurpleplans.org.
Q: What are the options for taking Social Security?
A: Full retirement age is 66 for those who were born between 1/2/1943 and 1/1/1955. If you start taking Social Security before your full retirement age, the benefits are subject to an early retirement reduction for every month you do so. For example, taking your own retirement benefit at age 62 rather than full retirement age (if your full retirement age is 66) means you have a 25% lower monthly payment.
The Social Security Administration raises your personal retirement benefit for every month you wait to claim your benefits beyond your full retirement age, and the raises continue through age 70. This Delayed Retirement Credit is 8% a year until you turn 70.
So if your Social Security retirement benefit was going to be $1,000 a month at 66, it would be reduced 25% to $750 if you claimed benefits at age 62. If you didn't take it until 70, it would raise 32% (four times the 8% annual increase) to $1,320.
Q: What is the biggest mistake people make with Social Security?
A People take their benefits too soon, because they are worried about dying before they collect. In so doing they may reduce or lose entirely the auxiliary benefits they can collect. They can also reduce the widow(er) benefits they can provide their current and former spouses. If you die early, you won't need money.
The real risk is living until 100 on relatively low benefits because you were impatient and took reduced benefits before your full retirement age. Benefits in real dollars (inflation adjusted) are 76% higher if you start them at 70 than if you start them at 62.
Q: So when do you recommend folks start taking it?
A: As laid out in the book, the optimal strategy is different for each household. Some workers should wait until 70. Others should file early in order to enable their wives, children or ex-wives to collect based on their work record. But if they do so, they have the option of suspending their benefit at full retirement age and starting it up again at, say, 70 at a higher value. For married couples the optimal strategy is a joint one. The optimal collection decisions one spouse makes depends on what the other decides and vice versa.
Q: Who is eligible for Social Security benefits?
A: If you have worked in covered employment for 40 quarters you can receive retirement benefits and also potentially provide spousal benefits to current and ex-spouses as well as your children. You can check out your benefits at ssa.gov/myaccount/, which the agency calls my Social Security.
Q: How does the Social Security Administration determine your benefit amount?
A: Social Security calculates a special average of your past (the highest 35 years) covered earnings, which it calls your Average Indexed Monthly Earnings. It then plugs your AIME into a formula that generates your full retirement benefit or primary insurance amount. The PIA formula is quite favorable to low contributors. But in absolute terms, those with more contributions get the largest benefits.
Q: What are the advantages of applying for Social Security and then suspending your benefit?
A: Formally filing for your benefit, even if you suspend it, can let your spouse and children collect spousal and child benefits on your work record. It lets you accumulate Delayed Retirement Credits so that when you restart your benefits they will be higher. This is only permitted between full retirement age and 70.
More from this month's Your Retirement Checklist: