(This article appeared previously on MarketWatch.com.)
President Barack Obama wants to eliminate, as part of his proposed fiscal year 2015 budget, aggressive Social Security claiming strategies “which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits to maximize delayed retirement credits.”
And that incentive, according to a series of just-released fact sheets from National Association of Social Insurance (NASI), is significant.
Getting 132 Percent of Your Benefit
Consider: If you claim Social Security at age 62, you’ll get just 75 percent of the monthly benefit you would have received had you waited until Full Retirement Age (which is between 66 and 67, depending on when you were born). But if you wait until 70, you’ll get 132 percent of what would have been your Full Retirement Age benefit.Or put another way, if your Full Retirement Age benefit is $1,000 a month, you’d get just $750 a month if you claim at age 62; $1,320 if you wait until 70.
The decision about when to claim Social Security decision is, for most people, not an easy one. To do it right, you need to consider many factors and try to answer many questions, some of which are, frankly, unanswerable.
It’s well worth reading and studying the NASI’s tool kit. It’s also worth learning what experts participating in an email discussion had to say about the it and what they think beneficiaries need to consider before taking Social Security. Five tips:
1. Take the claiming decision seriously. What’s especially difficult about choosing when to claim Social Security is that you have to make up your mind in your early 60s, long before you know the answers to your questions about your health and life expectancy.
“Unfortunately, some decisions have to be made early in the game, such as the decision about when to take Social Security, or what option to take from the defined benefit plan, and once made, are generally irrevocable,” said Chuck Yanikoski, president of Still River Retirement Planning Software and RetirementWORKS.
“Other decisions can be put off, or modified, but once made limit one’s future choices. So the further a person gets into retirement, the fewer options they have — and not only because of past decisions that they can’t take back, but because of declining health, fewer or no opportunities for re-employment, possibly declining asset balances, and generally no likelihood of other new sources of income or assets,” he adds.
Yes, there’s a continuing need to reassess and modify your plan as things change during retirement, but that cannot be an excuse for not doing the best possible job at retirement, Yanikoski said.
“Planning around the time of retirement has a much bigger impact than individual course corrections during retirement. So it is best to do that planning as if you were only going to get one shot at it,” he said.
2. Don’t use your break-even age. Advisers sometimes suggest, as part of the process, that you determine the age at which you would come out ahead if you delay Social Security. In other words, the experts want you to determine your break-even age.
The break-even age, according to an analysis by Rande Spiegelman, a vice president of financial planning at the Schwab Center for Financial Research, depends on the amount of your benefits and the assumptions you use to account for taxes and the opportunity cost of waiting.
In his analysis, Spiegelman calculated the break-even ages for a top wage earner turning 62 in 2013 with monthly benefits (in 2013 dollars) at ages 62 and one month of $1,923; 66, $2,591; and 70, $3,447. What he found was that the break-even age is between:
- 77 and 78 for the top wage earner deciding whether to take Social Security early at age 62 vs. age 66, the Full Retirement Age
- 80 and 81 for those deciding whether to take Social Security early at age 62 or 70
- 83 and 84 for those deciding whether to take Social Security at Full Retirement Age vs. age 70
Research, however, shows the Social Security Administration’s historical use of “break-even analysis” has the effect of inducing individuals to retire early, according to Jeff Brown, a professor at the University of Illinois.
Instead of using a break-even analysis, Brown recommends using “alternative frames,” which are much more in the spirit of how the NASI does in its toolkit. That sort of framing, he said, increases intended claiming ages by 18 to 24 months.
Indeed, in its tool kit, the NASI suggests that older Americans consider not their break-even age, but their life expectancy when deciding when to take Social Security.For instance, the NASI notes that an average 65-year-old male can expect to live 19 more years, to age 84, while an average 65-year-old female can expect to live about 22 more years, to age 87. In addition, the NASI suggests that nearly four in 10 women and three in 10 men age 65 today can expect to reach age 90.
3. Focus more on longevity risk. Brown, however, suggests that those trying to decide when to claim Social Security focus less on average life expectancy and more on the odds of living a long time.“My concern about focusing on life expectancy rather than the full distribution of longevity possibilities is that one could inadvertently put people back into the mindset of thinking in terms of break-even dates, rather than thinking about the sustainability of consumption,” said Brown. “Indeed, one of my pet peeves about financial planners (and financial planning software) is that they rarely discuss longevity ‘risk’ as opposed to average life expectancy.”
An arbitrary extension of life expectancy ‘to be conservative,’ Brown added, is not a substitute for a fulsome discussion of longevity risk. “If one does not explicitly consider the risk around average life expectancy, then one will never see why an annuity is an appropriate solution. It would be like trying to sell fire insurance, but instead of discussing the risk that your house will burn down, you only point out that on average 1 percent of everyone’s house will burn once a year,” he said.
Others, however, have a different point of view. “The Social Security decision is significantly different from some other longevity issues,’ said Yanikoski. “Financial planners need to look at extra-long life scenarios, because they are, usually, trying to figure out how to amortize savings — and obviously, a planned amortization using life expectancy leaves 50 percent of people in a catastrophe.”
Social Security isn’t like that, he said. “None of the choices leads to a catastrophic outcome, regardless of what happens,” Yanikoski said. “So with Social Security, the task is not to avoid catastrophe, but to optimize the chance of getting the best result. And the way to do that is to plan around the most likely longevity outcome.”
4. Consider personalized life expectancy. Other experts, meanwhile, say factoring life expectancy into the Social Security-claiming decision is important, but that it needs to be personalized.“What is conspicuously absent, however, is that many people, roughly 50 percent, do not live to their life expectancy or longer,” said Steve Mitchell, a consultant Oculus Partners and founder of Stephen W. Mitchell & Associates. “The important question that every potential beneficiary should ask, that is totally missing from the discussion and most of our industry discussion on outliving retirement income, is whether or not the overall average life expectancy is a good estimate of personal life expectancy or are there personal health or family history factors that should be factored into the individual’s decision.”
According to Mitchell, an important step for most considering the Social Security decision is to use a tool to estimate a “personal” life expectancy such as that found at the Living to 100 Life Expectancy Calculator.“At best, it’s still just an estimate, but better than making a big financial decision based on broad population averages,” he said.
In many cases, for those in good health, who don’t smoke and who have good family history, Mitchell said calculating your personal life expectancy will reinforce the key message that you may live longer than you expect and Social Security becomes an increasingly important source of income as you get older.However, for others who are in poor health, and who have family history of premature death and the like, Mitchell said, the considerations are different. “Of course for married couples, both spouses’ expectancy need to be considered and some of the more complex Social Security claiming strategies may provide significant benefits,” Mitchell said.
The exercise of creating a personalized life expectancy is worthwhile, but you shouldn’t go overboard. In his practice, for instance, Yanikoski considers only sex, smoking status,and a five-level self-evaluation of current factors health.
Of course, it’s possible that pushing people to claim Social Security at 70 might not be in their best interest.“I think that it usually is not prudent to use exaggerated life expectancies to make Social Security decisions,” said Yanikoski. “Although it seems ‘conservative’ in terms of longevity risk, pushing Social Security claiming toward age 70 severely reduces short-term income in exchange for potential very-long-term future gains.
For people of modest financial means, Yanikoski said this is paying a big premium up front for the hope of future benefits, even when that hope is against the odds, to the extent they assume longer-than-normal life expectancy. “In my view, this is not conservative; it’s risky and fundamentally imprudent gambling,” he said. “I don’t think we should be encouraging it.”
5. Stay flexible. Others, meanwhile, remind us that retirement planning is not once-and-done decision. Said Diane Savage, a certified financial planner and educator: “It requires attention throughout retirement with many course adjustments, if you will. So many of the factors related to retirement-income management are not controllable even though we like to think they are. It appears to me that there are many attempts to create certainty around something that is far from certain.”
The best plans, she said, are those that provide some guaranteed income sources as well as other income sources that can adapt and move with forces beyond the control of the retiree.
“This is the most appropriate path to provide more certainty for the retirement-income stream,” said Savage. “The best advice someone planning their retirement income can be given is be prepared to be flexible.”
By Robert Powell
Robert Powell writes about retirement issues for MarketWatch.com and produces the Retirement Weekly subscription newsletter.
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