How your clients can boost their Social Security check by 85 percent

For Americans, few decisions are as financially consequential as choosing when to take Social Security. Or as hard.

While you can tap retirement benefits as early as age 62, the federal government offers big financial incentives to wait. The rules are complicated, however — books have been written on Social Security's intricacies. And choosing to delay activation raises some arguably existential questions: If you maximize your benefit by waiting until age 70, what are you supposed to live on in the meantime? And what if you die earlier than you expected?

Here's some guidance, touching on a few new studies, for those looking down the barrel at their golden years.

Postponing may be even more lucrative

For every year you delay taking Social Security, the program boosts your monthly check by 7 percent. (In addition to any cost-of-living increases over those years.) By waiting until age 70, workers can get a guaranteed, inflation-adjusted income stream that's 76 percent higher for the rest of their lives.

That figure — 76 percent — is often quoted by Social Security experts. But according to a new study, it "sells short how much delayed claiming can increase Social Security income, especially among women."

It's more like 85 percent for older Americans who stay in the workforce, according to Matthew Rutledge and John Lindner of Boston College's Center for Retirement Research. The extra 9 percent comes from how Social Security calculates the amount of money each retiree should get. Since the program bases benefits on a worker's best 35 years of employment income, it penalizes those whose careers had periods of low earnings, or years when they earned nothing. Almost half of women — who often interrupt their careers to raise children — have at least one year with zero earnings among their top 35, for example.

By working longer, these workers can replace some of those low-earning years with higher-earning ones. An extra year of work would boost the average woman's monthly benefit by 8.6 percent per year, Rutledge and Lindner calculate, rather than 7 percent. Because men tend to have longer careers than women, they get a smaller boost, of 7.8 percent for each extra year they work. Those are just averages, however, and the benefit of working longer could be much higher for workers who have had shorter or less lucrative careers.

Many more Americans seem to be taking this advice, as the chart below illustrates.

The improving economy helped make this possible. With the unemployment rate down from over 9 percent in early 2011 to below 5 percent today, it's become far easier for an older American to get a job or keep a job. Indeed, more Americans are working past 65 than at any point in the last 50 years.

Delaying Social Security is a no-brainer if you live to 101, but predicting how long you will live is a generally unanswerable question. (Photo: iStock)

Certain groups should think twice about waiting

Getting the most out of Social Security comes down to a terrible, generally unanswerable question: When are you going to die? If you're going to live to 101, delaying Social Security is pretty much a no-brainer. If you're destined to die at 71, you might as well take the money as soon as possible.

The average U.S. life expectancy isn't much help to retirees pondering their demise. One reason is rising inequality: Even as the well-off are living ever longer lives, the latest data show the average American's health is getting worse.

A key variable is education, according to another study released this month by the Center for Retirement Research. Researchers Geoffrey Sanzenbacher and Jorge Ramos-Mercado calculated the best times for various demographic groups to take Social Security if they want to maximize the expected present value of their benefit stream.

"More educated workers have more incentive to delay claiming than less educated workers, and non-blacks have more incentive to do so than blacks," they write. Black and white men without college degrees tend to get the most benefits by claiming before the full retirement age, the authors find — though they're careful to say that their calculations shouldn't be taken as advice.

No simple answers

There are lots of reasons why someone might want to claim later, or earlier, even if their demographic profile suggests it isn't the ideal strategy.

"Any one of us is going to die just once," Boston University economist Laurence Kotlikoff said in an interview. Unlike an insurance company or a government program, "we're not going to be able to average over lots of outcomes. We have to be mindful of the worse-case scenario."

The worst-case scenario — at least when it comes to our finances — is the expensive prospect of living to age 100 or beyond. A healthy retiree might want to insure against that risk by delaying Social Security and boosting their monthly check for the rest of their lives, even if other factors suggest they're likelier to die by their 80s.

Adding to the confusion, there are incentives to stop working and retire earlier, thanks to taxes and government rules regarding benefit programs. In a National Bureau of Economic Research study issued last month, Kotlikoff and three other researchers calculated how older Americans are affected by federal and state taxes, Medicare and Social Security rules, and eligibility for Medicaid, food stamps, and other benefit programs. They found many seniors face a serious disincentive to work in their 60s and 70s because much of the money they earn can end up being lost to higher taxes or reduced benefits. Social Security's complicated earnings test is a "particularly significant" deterrent to working, they find.

One clear no-brainer

In at least one situation, delaying Social Security is the obvious choice, according to another NBER paper published this month. Doing so could save high-income seniors as much as $250,000, the authors find.

The calculations apply to retirees who are planning to eventually buy an annuity, or take a defined-benefit pension instead of a lump sum from their employer. In those cases, there's a clear "arbitrage opportunity" because delaying Social Security is an efficient way to boost benefits, the researchers state. Such retirees should live off their savings in the meantime rather than put all their assets into a private annuity.

It also may make sense to take part of a defined-benefit pension as a lump sum, and use that money to live while delaying Social Security benefits. "Employers could help employees integrate their pensions with Social Security deferral by offering annuities that provide higher payments through age 70 and lower payments thereafter," the authors suggest.

So, you don't know when you're going to die, and complicated government rules muddy your options even more. However, one thing is clear enough: If you're faced with a choice of which income stream to rely on for the rest of your life, Social Security is almost certainly the most powerful choice.

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