For all of Social Security's solvency problems, Americans, who are notorious for claiming benefits early and therefore leaving lots of money on the table, are doing their part to sustain the program.
But the savvy and disciplined Americans who delay claiming till age 70 to maximize their benefits may also be undermining their retirement income.
Yes, you read that correctly. It is almost a cardinal rule among financial advisors that their clients (in good health) should delay claiming—even past full retirement age of 66—to capture the 7% to 8% annual benefit increase that comes with each year's delay till age 70.
But T. Rowe Price has crunched some numbers and found that what it calls a "split strategy" may hold the greatest advantage for an average couple.
In that approach, the lower-earning spouse claims Social Security benefits as soon as possible—currently age 62—while the higher earner takes spousal benefits at full retirement age of 66 and delays taking his own benefits till age 70.
How can this be better than both waiting to claim maximum benefits at 70?
The reason, according to T. Rowe's Christine Fahlund, who performed the calculations, is that there are two key financial inputs in the financial equation: Social Security benefits and the couple's retirement savings.
"You don't want to dip into savings more than you have to," she said in an interview with ThinkAdvisor.com. "If you use the maximize strategy, chances are that's exactly what you'll be doing."
The finding came about as a result of the feedback T. Rowe gets from investors, who typically want to retire early.
"Although we espouse working till 70 […], most people are going to choke on that, saying, 'It's a nice idea, but not for me,'" Fahlund said. "You want to retire early, we get it."
Fahlund's recent study is based, as it must be, on various assumptions about the age, income and mortality of a retiring couple, but T. Rowe Price's free online tool allows people to customize their retirement for their own goals and finances.
In the fairly conventional scenario of Fahlund's study, the maximize strategy forces an average couple to dip into their savings in order to hang on till age 70, resulting in $80,000 more in retirement account withdrawals, on average, than the split strategy.
"[The study] should be a head turner because the mantra is so clear: 'Your client should wait, your client should wait,'" Fahlund said, adding that "the majority of tools say 'we can get you more […] over your joint lifetime.'"
