It's so tempting. You turn 62, and Uncle Sam is willing to start handing over Social Security benefits -- every month for the rest of your life. Before you take the money and run, consider the potential pleasures of deferred gratification. Whether you're single or married, waiting to claim your benefits -- even by a year or two -- is likely to pay off in higher benefits over your lifetime.
As income guarantees of private pensions disappear, one of the costliest mistakes a retiree can make is underestimating the value of Social Security, says James Mahaney, vice-president of strategic initiatives at Prudential Financial. There is no other type of retirement income stream that protects against market downturns, interest rate declines, inflation and longevity risk -- while also providing benefits for a spouse and survivor, Mahaney says. "The bigger Social Security can become as part of your portfolio, the better off you will be," he says.
Until recently, the conventional wisdom was that total lifetime benefits for someone with average life expectancy would be the same whether the beneficiary took a smaller benefit at 62 or a larger benefit at 70. But a growing body of research shows that, even when one's life span is shorter than average, it may pay to delay for at least a couple of years past the early retirement age of 62.
For most married couples, for instance, delaying benefits until 70 for at least the higher earner is a no-brainer. By coordinating the dates they each claim benefits to take maximum advantage of spousal and survivor benefits, a husband and wife can boost lifetime benefits by hundreds of thousands of dollars.
Many singles can benefit from waiting, too, according to research by economist Sita Nataraj Slavov of the American Enterprise Institute, a think tank. Today's historically low interest rates play an important role.
Think of it this way. If you take Social Security at 62, you'll be able to limit tapping your IRA or other savings. That could make financial sense if the dollar in your nest egg today will be worth more next year.
But with U.S. Treasuries earning an after-inflation rate of 0%, collecting Social Security benefits early becomes a bad deal, says Slavov and co-author John Shoven, an economics professor at Stanford University. Social Security benefits grow an average of about 7% a year between 62 and 70, not including cost-of-living adjustments. That means you're earning a bigger return by delaying Social Security benefits than you are on your safe investments. And the inflation-adjusted "annuity" you're getting from Social Security is considerably better than any annuity you can buy on the commercial market during this low-interest-rate environment. "With today's interest rates, some degree of delay is advantageous even for people" with lower-than-average life expectancies, Slavov says.
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