Social Security: It's Better If You Wait

Boomer alert! If you’re thinking about taking your Social Security benefits at age 62, think twice—or even three times. At least check out the advantages of waiting until age 66, or even age 70. That’s the word from experts who see ways for you to maximize their Social Security payments and increase your retirement savings.

Traditionally, about half of Americans take their benefits as soon as they’re eligible, at age 62. But many people who can afford to wait and are in good health find they can collect more money by waiting.

Here’s why: If your full retirement age is 66, but you start drawing your benefits four years early, at 62, you get only 75 percent of the full benefits that would be due to you at age 66. Furthermore, a person who postpones benefits for the four years from age 66 to age 70 gets an 8 percent per year boost in full benefits, or a total of 32 percent. That raises a monthly benefit of, say, $1,000 to $1,320. And, because so many people now live into their 80s and 90s, that boost can make a huge difference over time.

“Waiting until age 70 gives you a much bigger income for the rest of your life—no matter how long you live, no matter how bad the stock market,” says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries . “And your payment goes up with inflation.”

Moreover, people who postpone their benefits are likely to be working and contributing to their 401(k) savings plans, which can increase their incomes in retirement even more.

“The decision to delay retirement, by even a few years, can make a big difference financially—in the form of higher Social Security benefits, additional retirement plan contributions and added growth potential for existing savings,” wrote W. Van Harlow and Steven Feinschreiber in a January 2007 Fidelity Research Institute report.

For a married couple, it makes sense for the primary wage earner, typically the husband, to wait as long as possible. If a husband dies, his widow gets 100 percent of his benefit. The larger his benefit, the higher her payment will be for the rest of her life. (If her benefit is higher than his, based on her own work record, she would keep her own.) However, if the husband’s monthly payment were reduced because he started benefits at 62, the widow’s lifetime benefit also would be reduced.

Prudential retirement specialists James I. Mahaney and Peter C. Carlson have proposed that retirees take Social Security benefits as late as possible. Instead, they should tap first into their 401(k) or IRA savings for the money they need until Social Security payments kick in. The Prudential specialists acknowledge, however, that their idea may not work for everyone. “Retirees need to live into their mid-70s or early 80s in order to truly benefit from the strategy,” they wrote.

Experts also cite the opportunity to avoid unwanted income taxes as an important reason to delay collecting benefits, especially if you’re still working. Social Security payments are taxable, so the more you earn, the more your benefits can be taxed.

Stan Hinden is the author of  "How To Retire Happy: The 12 Most  Important Decisions You Must Make Before You Retire”(McGraw-Hill, 2006).