One of the most important — and vexing — decisions you'll have to make as you approach retirement is when to start taking Social Security benefits. For a program that's been around so long, you'd think that retirees would have the answer at their fingertips. Not so: Many people leave tens of thousands of dollars on the table by claiming too soon or not coordinating benefit strategies with their spouse.
The claiming decision is especially important to married women because they tend to outlive their husbands. Unfortunately, men too often take the retirement benefit that looks best now, even if it reduces the future income of the widows they might leave behind.
To get your full Social Security benefit, you have to claim at your full retirement age. That's 66 for people born between 1943 and 1954 (after that, it gradually creeps up to 67). You can claim as early as 62, but your benefit will be sliced by 25 percent. By contrast, you get a big bonus for retiring late. Your full benefit rises by 8 percent for every year between 66 and 70 that you wait to claim it.
If you're married and didn't work long enough to get a big benefit of your own, you can retire at 66 on half of your spouse's full benefit. If you retire earlier, you'll get less (the reduction is 30 percent if you're just 62). If you are widowed, you can switch to a survivor's benefit, which generally equals the payment your late spouse was getting. Qualified divorced spouses whose marriages lasted at least 10 years get the same benefits on their ex's account.
The case for delaying
In short, the best advice for claiming Social Security is to wait. Yet 41 percent of men and 46 percent of women retire at age 62 on the smallest possible benefit check. Only 14.3 percent of men and 9.7 percent of women wait to collect their full check at age 66. Even fewer wait until they are 70.
The main reason for claiming at 62 is that you need the money. If true, your options are foreclosed. But if you're still working, you might consider living on your current earnings plus savings for a few more years in order to nail down a higher Social Security check for your older age.
Of course, some people claim their benefits at the earliest opportunity just for the pleasure of having the extra money now. They'll cross the bridge to older age when they get there and, in the meantime, they're booking a cruise. Or perhaps they want to be sure they get every single dime the government owes them. If they put off taking benefits and died early, they'd feel rooked.
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Don't let such thinking tempt you. If you are the major breadwinner in your family and choose to collect early, you will end up reducing — significantly — the amount of survivor's benefit your spouse will get. Looked at that way, your beloved is the person being cheated, and you did the cheating.
Financially, your chief risk today comes not from dying too soon but from living too long and running out of money. That's a risk that Social Security is uniquely able to insure. Roughly speaking, the program calculates payments to cover your expected lifespan. For men at 62, that's age 83. For women, it's 85. If you live longer — and there's a 61 percent chance that one half of a 62-year-old couple will live until at least 87 — delaying your claim date will pay off in higher lifetime benefits. Bigger checks are especially valuable toward the end of life, to protect against inflation (Social Security benefits rise with the cost of living). Even a husband in poor health should consider delaying a claim in order to leave a higher survivor's benefit for his wife.
Your retirement choices vary, depending on your marital status. If you're single, your claiming age will depend entirely on your finances, interests and health. If you're still working, you can start benefits at 66 today and collect your full salary, too (under 66, your benefit is reduced by $1 for every $2 you earn over $15,120 this year).
Strategies for married couples
Couples can greatly increase their lifetime Social Security wealth by coordinating benefits — if you can afford to delay your claim, say, because one partner is working or you have savings to live on. Here are two examples, assuming a bread-winning husband with a slightly younger wife who has a modest Social Security benefit of her own:
1. Claim and switch. The wife takes her own retirement benefit at 62. When her husband reaches full retirement age, he files for spousal benefits on his wife's account (that's called a "restricted application"; he has to be at least 66 to qualify). He would get half of her benefit. At 70, the husband switches to his own benefit, which has grown by 8 percent a year plus cost-of-living increases. If he dies first, his wife switches to her survivor's benefit, now enhanced by those 8 percent gains.
2. File and suspend. The husband files for his own retirement benefit at 66 but asks that it be suspended. That lets his future benefit continue to grow. His wife immediately files for spousal benefits on her husband's account. Again, she would get one-half of his benefit. At 70, he claims his payments, including those lovely 8 percent increases.
They'd play it differently if both partners had high earnings. The husband might file and suspend at 66. When the wife reaches 66, she'd request spousal benefits on his account. At 70, each of them would claim retirement benefits based on their personal earnings record.
The optimum strategy will vary, depending on the couple's ages and which spouse has the higher earnings. For help, check out AARP's free Social Security Benefits Calculator or the Social Security Administration's website. Or you can go to two fee-based websites: SocialSecurityChoices.com, which gives you a personal report for $39.99, and SocialSecuritySolutions.com, which charges $20 for a simple report and $50 and up for interactive reports that let you compare various strategies.
A note to same-sex couples
Under Social Security law, you can get spousal benefits only if you live in one of the 13 states (or Washington, D.C.) that recognize your marriage; also, perhaps, in the seven states that permit civil unions with inheritance rights. Still, retired same-sex couples in other states may want to file for benefits now, to establish the date of their request. If the law changes, you could petition for benefits based on your claim date.
Jane Bryant Quinn is a personal finance expert and the author of Making the Most of Your Money NOW.