Deciding when to take your Social Security benefits is one of the most important retirement moves you can make—and it's one that a lot of Americans get wrong. The good news is that new tools and services are being launched that can help you avoid these costly missteps. The latest entry: Social Security Income Planner, was unveiled today by 401(k) advice provider Financial Engines.
Unlike some of the tools out there, the Financial Engines calculator is easy to use and free. After sifting through thousands of claiming strategies, the calculator presents you with the best filing choice for you and your family, at least according to Financial Engine's algorithms. It can also include your assets (and your spouse's portfolio) as part of the retirement income analysis.
“Social Security is incredibly complex and most people miss out on tens of thousands of dollars in benefits by claiming too soon or not coordinating with their spouse,” says Christopher Jones, chief investment officer at Financial Engines. A single person could be passing up as much as $100,000 over a lifetime by claiming Social Security early, while a married couple could lose $250,000 in lifetime income, says Jones.
Take a married couple: Jane, age 57 and Ian, 59. He earns $65,000 a year, while she earns $35,000. He wants to retire at 65 and she at 63. If they both take Social Security at those ages, he will get $24,500 a year, and she will get $12,600, giving them a combined income of $37,100 annually. That adds up to lifetime benefits of $872,300, based on Financial Engines' estimates.
A different claiming strategy would give this couple an additional $131,700 more in lifetime income from Social Security, bringing their total lifetime benefits to $1 million, according to Financial Engines. Jane still files for Social Security at 63, while Ian delays taking his Social Security until age 70, which is when you get the maximum benefit. But at age 66, which is his full retirement age, Ian files a restricted application to claim a spousal benefit based on Jane’s income, which gives him $8,100 a year, which gives them a total $20,700 a year in income. Then he switches to his own benefit at age 70, boosting their payout from Social Security to $45,300 a year.
But many people don’t understand these options. Three out of four people say they are confident about their ability to make a good Social Security decision, according to a Financial Engines survey. But when those surveyed were asked basic questions about the way Social Security worked, 73% got most of the answers wrong.
When you get beyond the basics, it's hard not to be confused. There are more than 8,000 claiming strategies for married couples, says Jones. You can file for Social Security as early as age 62 and many people do—40% start benefits at age 62, while 60% do so by 65. Fact is, every year you wait to take Social Security, your income increases 6% to 8% a year until you reach age 70.
The additional income you receive by delaying can make a big difference in your retirement security. If you had annual benefits of $18,900 at age 62, you would get $27,216 by waiting till age 67 and $33,264 a year by holding out till 70. As a recent Nationwide survey found, nearly 25% of those who claimed Social Security early regretted that decision. “Your chief risk today comes not from dying too soon but from living too long and running out of money,” says Ron Keleman a financial planner in Salem, Oregon.
Your family may also regret your decision. Married women tend to outlive their husbands, yet men often take the retirement benefit that looks best now, even if it reduces their spouse's future income after they pass away. And if you have children, your decision would also affect their survivor benefits.
Thinking about your claiming options before you file for Social Security benefits can help not only you but your family as well. Start by checking your estimated benefits at Social Security, then try a online tool. In addition to the Financial Engines calculator, others include those at T. Rowe Price, AARP, Social Security Solutions ($50 fee). Or consider working with a financial adviser.