The Other One Percent
Posted by Frank Napolitano on January 26, 2016
There’s been a lot of discussion lately about “the one percent.” And while income inequality is an important topic, I want to talk about “the other one percent.” This is not an article about Thomas Piketty or tax policy. Rather, this is an article about the Americans who wait until 70 to claim their Social Security retirement benefits (technically that number is 1.5%, but that number would have required me to change my oh-so-clever title).
In this article I’ll briefly discuss how the timing of Social Security filing affects retirement benefits. I’ll then review when Americans actually file for benefits and offer some suggestions as to why.
Filing for Social Security Retirement Benefits: A Review
Social Security is a complex system with many types of benefits. For purposes of this article, I’m going to focus exclusively on retirement benefits.
Your Full Retirement Age (“FRA”) benefit is the retirement benefit you are entitled to if you file for benefits at your Social Security full retirement age (between 66 and 67 depending on when you were born). You can find your FRA benefit on your Social Security report.
You can file for your benefit as early as 62, which will result in an “Early Retirement Reduction.” This reduction, which is anywhere from 25% to 35% of your FRA benefit, is a lifetime reduction. So, for example, if your FRA benefit would have been $1,000 per month and you filed for benefits at age 62, your monthly benefit would be $750 for life (plus cost of living adjustments).
You can delay benefits beyond FRA up to a maximum age of 70. This would allow you to accumulate “Delayed Retirement Credits,” which would increase your benefit by 8% per year, or 0.67% per month, for life. So, for example, assuming the same FRA benefit as above, if your FRA is 66 and you delay your retirement benefit until age 70, your monthly benefit would be $1,320 (or $1,000 plus 8% x four years).
Filing… By The Numbers
Imagine yourself at a financial planning conference (exciting I know!). Let’s say you poll every planner at the conference, asking them this simple question, “What’s the single best step your clients can take to maximize the possibility of not outliving their assets?” My guess is the majority of planners would tell you that people should delay receiving their Social Security benefit for as long as possible, preferably until age 70 (remember, doing so could increase their retirement benefit by as much as 32%). The rationale: by delaying your benefit until 70, you’ve increased your guaranteed income floor for the rest of your life.
So how does this advice play out in the real world? Let’s take a look at the numbers. Data from the 2012 Social Security Report shows when Americans filed for Social Security retirement benefits:
|Before age 66 (FRA)||63%||69%|
|From 66 through 70||21%||16%*|
*NOTE – the numbers do not sum to 100%. The differences are disability payments, which automatically convert to retirement payments at FRA.
The data tell us that, contrary to the advice of many financial professionals, the vast majority of Americans file for benefits early, i.e., before Full Retirement Age(!). In fact, in 2012 some 38% of men and 43% of women filed for their retirement benefits as early as possible (at age 62). Importantly, of the people who waited at least until FRA, how many of them waited until age 70? Put another way: How many Americans maximized their Social Security retirement benefit in 2012? The answer: the other one percent.
This is quite a shocking statistic. Consider all of the factors today that make retirement more expensive for retirees: historically low interest rates; increased longevity; higher healthcare costs. Yet an amazingly small percentage of Americans delay receiving Social Security, which many financial planners consider to be the best strategy to maximize your chances of not outliving your assets.
What’s going on here? It’s true that many special circumstances force people to claim benefits early. However, this does not explain why only 1% of us wait until age 70. I think the primary reason we don’t take advantage of this strategy has to do with our nature: we’re wired to think in the short-term. Making sound financial decisions often requires us to forgo an immediate benefit (spending) in favor of a future one (saving). It’s similar to the patient who asks her doctor how to lose weight. We all know the answer: eat healthier and exercise. The issue is it’s hard to follow through on a plan in the face of short-run temptations.
In my next article, I will quantify the benefit of delaying Social Security. I’ll also discuss the pitfalls of making a break-even analysis of Social Security benefits, i.e., at what age will my total benefits if I wait to take the higher benefit be greater than my total benefits if I don’t?