With all the chatter about the intricacies of Social Security claiming strategies, one thing to remember is that one size really doesn't fit all when it comes to deciding when, and how, to claim benefits. A new analysis by Social Security Choices makes that point loud and clear.
According to Social Security Choices, merely delaying one's claim to benefits will certainly up the ante, but perhaps not enough to make it worthwhile.
Also read: Social Security expertise in short supply
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To calculate an individual's monthly benefit, the Social Security Administration considers lifetime earnings, their age when they start to collect, and their average life expectancy at that age.
A man who starts collecting at 65 and lives until the male life expectancy age of 84 will have earned more in total than if he started to collect at 70. But waiting would have yielded a higher monthly payment, which makes sense for anyone who failed to save enough.
But Social Security Choices took it further than than, analyzing the increase in benefits for each year of delay based on nominal (not adjusted for inflation) rates of return.
Assuming an annual Social Security benefit of $9,000 per year at age 62, waiting until age 63 would increase that amount by $600, it said.
That single year of waiting would add, for "a male with a normal life span of 82 years" an implied annualized return (on the "investment" of one year's $9,000 in benefits) of 2.9 percent.
However, the rate of return for the same delay for a woman with a normal life span of 86 years would be 4.2 percent, because of her longer life span.
If you then add in 2 percent in annual cost-of-living adjustments over approximately the next 25 years, those nominal (again, not adjusted for inflation) rates of return would rise to 4.9 percent for the man and 6.2 percent for the woman.
It gets even more impressive waiting one more year, at which point the return will be 7.1 percent (males with normal life span)/8.3 percent (females with normal life span).
However, single males are generally best advised not to bother waiting past 69; waiting until 70 will still gain more money, but because male life expectancy is shorter than female, men are statistically less likely to recoup that extra year's delay.
That said, singles are perhaps the least complex, with the rate of return depending only on longevity.
Figuring out the best strategy for couples is considerably more complicated, since variations depending on the age of each spouse play a large role in what will provide a greater payoff and some strategies may not work well.
But as an incentive to learn what actually will work best for a couple, both parties should remember that in at least one example, one spouse using file-and-suspend while the other spouse waits until age 67 to claim their own benefits can result in a return of 36.2 percent.
If that's not incentive to check out your options, what is?
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