Welcome back to Financial Literacy Month. Most readers of this
column, I know, are saving for retirement but aren't at
retirement age yet.
So every once in a while, I like to do a "call your Mom"
column. People on the verge of retirement or newly retired are
called upon to make all sorts of major financial decisions that
will have a huge impact on the rest of their lives.
One of the most important decisions is when to claim Social
Security, and too many people make the wrong choice and end up
saddled with unnecessary money worries and simply less to spend
Social Security is very complicated-no surprise, given that
it's a venerable government program.
When it's time for you-or your parents-to choose when and how
to file for and claim benefits, consider enlisting the help of a
fee-only financial planner experienced with Social Security. You
can find one through the
of Personal Financial Advisors
But here's a brief overview; the basic principle is
surprisingly simple, and it's also easy to see why people do it
The waiting is the hardest part.
The basic principle of claiming Social Security is this:
A single person, or the higher earner in a married couple,
should wait until age 70 to start receiving benefits.
That doesn't mean waiting until 70 to retire. It means
spending down your retirement savings from the day you retire
until age 70, and then supplementing your savings with Social
Why? Because the longer you wait to take Social Security (up
to age 70), the bigger the monthly payment (it goes up 8% per
year after your official "full retirement age", plus
The payments last for the rest of your life-or, in the case of
a married couple, for the rest of both of their lives. And the
payments are indexed to inflation.
When you spend down your portfolio and wait to take Social
Security, you're essentially converting part of your portfolio
into a guaranteed annuity better than you can buy from any
Your payment is unaffected by market performance, and you
can't outlive it. "[T]he true value of delaying Social Security
is a triple-benefit of hedging longevity, poor returns, and high
inflation," wrote financial planner Michael Kitces on his
Nerd's Eye View
blog last year.
And if the idea of a Social Security check brings to mind an
impoverished elderly person just scraping by, think again: a
couple who both worked long careers at decent salaries could
easily end up collecting over $60,000/year in Social Security
payments if they claim at 70-and the money isn't even fully
Why not take the money and run?
Folks who've been through the Social Security process will
note that I haven't said anything about spousal benefits.
For a couple with one working spouse or where one spouse
earned much more over their career than another, the higher
earning should "file and suspend" at full retirement age so their
spouse can begin collecting a spousal benefit.
And there are other complicated filing strategies that a
financial planner can help you untangle. I also recommend Jim
Blankenship's detailed book
Social Security: An Owner's Manual
Yet too many retirees don't untangle anything: they file at
62, even though the system penalizes you for taking Social
Security before your official retirement age.
The number one reason people do this, unfortunately, is
because they have little or no retirement savings.
"Imagine the person age 62 and retired due to a layoff, who
has no savings whatsoever," says Mike Piper, author of
Social Security Made Simple
"That person obviously has to claim at 62."
But nearly half of all Social Security recipients claim their
benefit at age 62, according to
research by Boston College
, and not all of them are impoverished. Another reason people
give for claiming early is that they want to get in ASAP, before
the program is gutted by Congress or runs out of money.
I understand the sentiment, but any cuts to Social Security
are likely to fall most heavily on the wealthiest recipients or
affect all beneficiaries proportionally.
Claiming early to avoid a hypothetical cut that would
disproportionately affect people who file later is a gamble- on a
political long shot- that will affect the rest of your life,.
Finally, one possible although unfortunate reason you may need
to claim Social Security early is if you have good reason to
believe that your remaining life will be short. In that case,
sure, get it while it's hot.
I'm writing about this seemingly arcane and definitely boring
topic because I've seen people in my family make this mistake and
then worry about outliving their money, for no good reason.
In some cases, I've been able to help them fix the mistake,
but the Social Security Administration changed its rules a couple
of years ago to make it harder to undo claiming decisions: in
general, after 12 months you're stuck with what you've got.
Given that this is Financial Literacy Month, however, I
figured it was time to open the Social Security box and look at
some of the rusty gears. Go ahead. Print this column and send it
Editor's Note: This article by Matthew Amster-Burton was
originally published on
See more from
Disclosure: Michael Kitces contributed to
a Kickstarter campaign
held by the writer.
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