Losing Social Security benefits by waiting to claim?

Carolyn: I may claim Social Security when I reach my full retirement age, which is happening soon, or I can wait until later. But if I wait, I will be losing all those years of payments. My sister keeps telling me you need to claim then to avoid losing all that money. Is this true? No one has ever mentioned this in anything I’ve read.

Phil Moeller: The Social Security book I co-authored has more on this topic than you probably want to read! In brief, if your full retirement age is 66, your monthly benefit if you wait until 70 to file will be 32 percent higher for the rest of your life. Of course, you would be giving up four years of age-66 benefits. And those benefits, I should stress, would be 32 percent lower than your age-70 benefits for the rest of your life.

There is a large amount of information on the internet that advises people to make this important claiming decision by calculating their personal “payback” periods, which are defined as the length of time it would take their cumulative age-70 benefits to equal what they would have received had they claimed at age 66.

For example, if you were due $2,000 a month if filed at age 70, you would receive only about $1,515 a month if you filed at age 66.

Filing at age 66 would provide you 48 months of those $1,515 benefits  by the time you turn 70. That totals $72,720 – a nice amount, to be sure. There are taxes on Social Security benefits, you can never be taxed on more than 85 percent of your benefit. In this case, you’d report about $61,800 in taxable Social Security income, or a bit more than $15,450 a year. If the tax bite on this was, say, 15 percent, you would pay about $9,300 in federal income taxes during those four years, reducing your $72,720 to $63,450.

If you were able to save and invest all these funds, of course, your net gains might well be larger than $72,720. You can do the math that reflects your tax bracket and the amount of benefits you’d be able to save.

Waiting until age 70 to file would provide you $485 more in benefits each month –$2,000 versus $1,515. This would amount to $5,820 a year, and it would take you about 11 years to “break even.” However, this assumes you saved every penny of your age-66 benefits. I don’t think this happens very often in the real world, but at least you can see how the numbers play out.

I think that gains in longevity make waiting the superior option, unless you have life-shortening health conditions or are in such need of current income that you can’t really afford to wait. Otherwise, waiting until 70 substantially increases the odds that you will not outlive your retirement funds. Opinion surveys regularly find that people fear this more than actually dying!

For couples, maximizing the higher earner’s benefit in this manner also guarantees that whichever spouse lives the longest will have the household’s highest possible Social Security benefit.