Social Security: The Biggest Decision You'll Ever Make

When to pull the trigger on Social Security benefits is a decision worth big money.
Steve Gorin is a lucky man. He says he's very fortunate to work in a profession that allows him to retire later than most Americans. The 67-year-old professor of Social Works at Plymouth State University in New Hampshire is opting to wait and take Social Security when he turns 70. It's a strategy he's thought through and one that will financially benefit he and his wife Cynthia in their retirement.

By waiting until 70 instead of retiring at 62, Gorin will receive 76 percent more a month in Social Security benefits. It's 32 percent higher than if he took benefits at his full retirement age of 66.

There are also other advantages for waiting since Social Security benefits are based on the highest 35 years of earnings. Many older Americans add to their benefits by earning more as they approach retirement. Gorin, who has a part-time job as well as executive director of the New Hampshire chapter of the National Association of Social Workers, says he'll be ready for retirement.

That's important to Gorin because the school doesn't provide a pension. It does have a 401(k) plan that he's contributed and will help in his retirement years. But as long as he was healthy, he could keep working, Gorin saw the benefit in waiting.

"I'm not going to be Bill Gates, but I certainly would be in a lot better spot than if I took it age 66," Gorin says. "A defined contribution plan depends on the ups and downs of the market. The markets took a hit over the last several years and so did my defined contribution plan. My wife also works for the same school (as a professor), and she's also hoping to wait until age 70. We're not pleading poverty, but having the additional funds will be helpful to us in retirement."

Gorin estimates he'll earn slightly less than $3,000 a month once his Social Security benefits kick in. Once he starts earning those, his wife Cynthia Moniz will be able to take a spousal benefit and get a portion of his benefits at age 66 without affecting her ability to work and earn income. That allows her benefits to grow by 32 percent until age 70.

"I want to stress my position is a fortunate one and I recognize that others don't have the job opportunities that I have," Gorin says. "There are people that lose their jobs and are forced to take it at age 62 or 66 and people who physically can't keep working beyond 62 or 66. I work hard but my job doesn't involve physical labor. I'm not somebody who stands on their feet all day or works in a steel mill or factory."

People need to consider all sources of income before making a decision about Social Security, including the use of a reverse mortgage that are growing more popular.

For those with income from a 401(k) or IRA, they can draw from that income first before taking Social Security and bridge the gap that they need, according to the experts. Getting an eight percent gain from Social Security in their lifetime benefits for every year of delay and having it adjusted for inflation can't be beat.

"It's hard to find that kind of guarantee in terms of returns," says Kelly O'Donnell, vice president of marketing for Financial Engines, a defined contribution management account provider. "In that age group, they have a more conservative portfolio more about creating income than growth. They traditionally have a lower return than eight percent."

Maximizing Social Security is important with more than 10,000 baby boomers a day retiring and more than half take their benefits at age 62. Two-thirds of Americans take Social Security benefits when they turn 62 or three months of their retirement. That's vital because the Social Security Administration reports that nearly two thirds of those 65 and older get more than half of their income from Social Security and one report says 80 million workers aren't covered by any retirement plan and will have to rely on Social Security unless they work part time.

"How may I not help you?""The Social Security office isn't going to advise what's best for you regarding your benefits."

The Social Security Administration reports the average monthly benefit is just below $1,300 a month, which equates to about between $15,000 and $16,000 a year. The Washington, DC-based Employee Benefit Research Institute reports of those people 65 and older who fell in the lowest 60 percent of incomes, relied on Social Security for 88 percent of their income in 2010. It's even more important for them since many are trying to pay for rising rents or cover mortgage payments to stay in their homes.

That's why the decision to take benefits is important and the numbers show how the difference is staggering, according to the nonpartisan National Academy of Social Insurance, which has launched a public education drive. For someone who's scheduled to receive $1,000 a month in Social Security benefits at their full retirement at 66, they would only receive $750 a month if they started accepting at 62. In contrast, if the person waited until 70, they would make $1,320 a month, a 76 percent gain over what they would accept at 62.

"The purpose of our project is to help people understand the case for delaying Social Security if they can," says Virginia Reno, vice president for income security policy for DC-based NASI. "We aren't telling people what to do, but we sense that it hasn't been explained very well to people that the benefits are much higher if you wait and claim them later."

People can sign up with the Social Security Administration to check where they stand on what monthly benefits they'll receive at ages 62, 66 and 70. It will also list their annual earnings over the course of their life.

Jim Blankenship, a certified financial planner and author of A Social Security Owner's Manual says if you've worked for only 30 years in which Social Security taxes were withheld, that means those five years would have zeros averaged into the calculation. For those with at least 35 years of employment, they may not have zeros but their incomes were so low when they were younger that it will bring down their monthly benefits once they take Social Security, he says.

"If you have zeros in your past or low earning years, you want to replace them to boost your benefits," Blankenship says. "It depends on the earnings, but it could be substantial. When you are talking about monthly benefits of $1,200, it could bring it down $100 or $200 a month.

Financial planners and experts on Social Security are offering advice and software programs to help older Americans make the right decision with their financial future and retirement. Social Security is so big and the rules so complicated that if you go to the Social Security office, they don't offer you advice, says Stephen Wright, an associate financial planner with The Enrichment Group in Miami.

"They're not financial planners," Wright says. "They're there to help you do what you want to have done. They're not going to advise you on what's best for you regarding your benefits because they don't know your financial situation."

Many would be surprised to learn they're leaving money on the table when it comes to claiming all of the benefits for which they're entitled such as the spousal benefit that Steve and his wife Cynthia are eyeing.

"It's a great way to earn some extra income in your 60s, but many people lose out because they just don't know about it," Wright says. "It's a complicated system, and people are missing out on benefits they could be receiving because of it."

The Social Security rules are complicated and subject to change and people need to be aware of what's happening and plan their strategy from there. That includes examples cited here.

The federal government may pull in the reins of one option observers refer to as wealthy Americans "gaming" Social Security. Some have essentially called it "free money." President Obama's 2015 budget is targeting the strategy of "file and suspend" where one spouse at full retirement age of 55 decides not to take their benefit and allow it to grow 8 percent a year until age 70. That enables the spouse to take 50 percent of the other spouse's benefit while still allowing it to grow.

The Center for Retirement Research at Boston College reported that 46 percent of the file and suspend benefit goes to the top 40 percent of wealthiest households.

Dr. William Reichenstein, financial author, Baylor University professor and head researcher for Social Security Solutions, says the example like the two married university professors waiting to take their benefits and taking spousal benefits should pay off over the long term in excess of $200,000.

"Most people want to get the most as they an get as soon as they can without giving thought to it," Reichenstein says. "In present value today you're talking from $1.3 to $1.5 million. That's a $200,000 difference if they started at 62. I don't care how wealthy you are, this is a valuable asset and prudent management is so very important."

If you live to 80, the present value of benefits is about the same no matter if you start at 62 or 63 and any age through 70, Reichenstein says. If you're single and confident you're going to die before 80, you want to start benefits as soon as possible, he says.

"It depends," Reichenstein says. "If you're still working, your earnings may wipe out your benefits. You may not effectively be able to start until age 66. But if your life expectancy is going to be longer than 80, you may wait until 70 to maximize your expected lifetime benefits. If you're worried about running out of (money) in your lifetime, you want to talk about delaying benefits. Social Security is one benefit you can't outlive. If in doubt, it's better to wait."

Reichenstein, 62, says the same principal applies to couples. Since he's the higher earner in his family and his wife is six years younger, it's best to wait to maximize benefits because she earns them after his death.

By waiting to 70 instead of taking benefits at 66, Reichenstein says that is a 32 percent increase and yearly benefits can surpass $41,000 a year instead of $31,000 a year.

"In today's purchasing power and if my wife lives to only 85, and I think she'll live longer than that, then you're talking about another $210,000," Reichenstein says. "Making the wrong decision can be a very costly mistake. No one knows for sure how long they're going to live, but in this case by just waiting until 70, that's an extra $10,000 a year."

People can continue to work while on Social Security but it won't affect their benefits unless they earn more than $15,480 a year. The Social Security Administration withholds $1 for every $2 earned over that amount. It withholds $1 for every $3 of earnings above $41,400 a year. It only applies to those below their full retirement age, which is 66 for those born prior to 1960.

For John Jensen, a retired high school physics teacher from Omaha, the math worked best for him and his wife, Sandra, a homemaker, to take his Social Security benefits at age 62. Jensen, who's now 69, retired from teaching at 58 at which point he received deferred compensation that covered his health insurance costs until he was 62.

While Jensen drew a teacher's pension, he opted to take Social Security at 62 to help cover his $1,000 a month health insurance until he became eligible for Medicare at 65. He did so based on his life expectancy.

Those numbers change and studies released today show that women who turn 62 this year should expect to live to 83 if you're a man and 85 if you're a woman.

"Everyone goes through that decision when they hit that age," Jensen says. "Should I take it or should I wait. I would have had to wait to 66 until you get full Social Security. They work it out so they get approximately the same lifetime benefits. The 62-year-old will take it for more years but at a lesser amount. The 66-year-old will get slightly higher amount for fewer years. On average it works out to be the same lifetime benefit for me."

Given the uncertain financial possibilities all of us in this country continue to face, Steve Gorin is absolutely right to consider himself a very fortunate man indeed.


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