MONEY Social Security

How to Choose the Social Security Claiming Age That’s Right for You

Getty Images

More people are catching on to the benefits of delaying Social Security. But the real issue isn't when everyone else claims—it's finding the strategy that fits your goals.

Retirement experts have been pounding the drums for years about deferring Social Security benefits and allowing them to grow until claimed at age 66 or even as late as 70. Yet average retirement ages have moved little—most people continue to file at or near age 62, the earliest that standard retirement benefits can be claimed, Social Security data show.

Now, thanks to some new research by the Center for Retirement Research at Boston College, this puzzling contradiction has been solved. It turns out that people are aware of the benefits of delayed filing and, in fact, have been claiming later for many years.

Why the discrepancy in these numbers? In its analysis, Social Security looks at when people file for retirement benefits and does a year-by-year calculation of average claiming ages. This approach works fine during periods of stable population growth, but not so much today.

Social Security’s method fails to account for the soaring numbers of Baby Boomers reaching retirement age. For example, nearly 900,000 men turned 62 in the year 1997, while in 2013, roughly 1.4 million men did so. Even so, a smaller percentage of 62-year-old men filed for Social Security in 2013 than in earlier years. But because the number of 62-year-old retirees make up such a big share of all claims, the average age has remained largely unchanged.

To get a better picture of claiming trends, the Center also used a lifecycle analysis. Instead of tracking the ages of everyone who began benefits in a certain year, such as 2013, it calculated the claiming ages of everyone by the year in which they were born. Looking at this so-called “cohort” data, it became clear that average claiming ages actually had increased far more than people thought.

In 2013, for example, 42% of men and nearly 48% who claimed that year were 62 years old. But only 36% of men and nearly 40% of women who turned 62 in 2013 actually filed for Social Security. “The cohort data reveal that the claiming picture has really changed,” the Center said.

I am cheered by these new findings. People should consider deferring their Social Security benefits and see how doing so would affect their retirement plan. But the key word in that sentence is “plan.” You need one, and it should include figuring out the best Social Security strategy for you, not what’s best for other retirees. Here are the steps to get there:

  • Compare the tax benefits. Our hearts tell us that preserving 401(k) dollars in our nest eggs is essential. But when it comes to spending down those assets in order to delay claiming Social Security, the deferral strategy looks very good. Between the ages of 62 and 70, Social Security retirement benefits rise 7% to 8% a year. They are adjusted upward each year to account for inflation. They are guaranteed by Uncle Sam. Federal taxes are never levied on more than 85 cents of each dollar of Social Security benefits, and most states don’t tax them at all. Compare these terms with 401(k) gains and taxation, and then decide which dollars are most worth preserving.
  • Assess the cost of early claiming. Social Security benefits claimed before Full Retirement Age (66 for people now nearing retirement) are hit with early claiming reductions and, if you are still working, subject to at least temporary benefit reductions caused by the Earnings Test.
  • Weigh the Medicare impact. If you have a health savings account (HSA) through employer group insurance and are eligible for Medicare, filing for Social Security will force you to take Part A of Medicare. It’s normally free but the consequences are not: the filing will force you to drop out of your HSA.
  • Consider longevity risk. Review your family health history, complete an online longevity survey, and estimate your probable lifespan. What does this number say about how long your retirement funds need to last and when you should begin taking Social Security?
  • Think about your family. Will you still have school-age children at home when you turn 62? If so, filing early for Social Security may allow your kids to claim benefits based on your earnings record. This is one case when filing early may put more money in your pocket.
  • Plan for your spouse. Survivor’s benefits are keyed to the Social Security benefits received by the deceased spouse. So, the longer a spouse waits to claim, the higher their partner’s survivor benefit will be. This is a real issue for millions of women who survive their husbands and whose own retirement benefits are smaller than their husbands because they have earned less money in their lives.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How the Social Security Earnings Test Could Wipe Out Your Income

MONEY retirement planning

The 5 Best Free Online Retirement Calculators

Calculator
Charlie Surbey—Gallery Stock

To be sure you'll reach your retirement goals, you've got to run some numbers. These 5 tools can help you get started.

If you want to be serious about retirement, you’ve got to crunch some numbers. Otherwise, you can’t really tell amidst the ups and downs of the economy and the market whether you’re on track toward an acceptable post-career lifestyle. These five tools, all free, can help improve your planning and your prospects. You’ll find links to all five in RDR’s Retirement Toolbox.

1. Retirement Income Calculator This T. Rowe Price tool allows you to provide detailed information about your finances—how your savings are invested, pension and Social Security payments, income from part-time work, if any, etc.—so you can come away with a nuanced sense of your retirement readiness. Once you know where you stand, you can then run alternative scenarios to see how you might improve your prospects. If you’ve already retired, this tool will help you determine whether your current level of spending is sustainable throughout retirement or whether you need to tighten your belt.

Rather than estimating the size nest egg you’ll need in retirement as many calculators do, this tool focuses on sustainable income. Specifically, you enter the amount of income you expect you’ll need in retirement (say, 80% of pre-retirement salary) and the tool uses Monte Carlo simulations to estimate the likelihood that the resources you’re projected to accumulate (or have already accumulated if you’re retired) will generate sufficient income throughout retirement. Generally, you want to see a success rate of at least 80%. If you fall short of that level, you can see how changing different aspects of your finances—saving more, spending less, cutting investment fees, etc.—might improve your chances of success. Revving up this calculator every year or so and making small tweaks as needed can prevent you from falling behind in your planning and help you avoid having to make dramatic and painful adjustments to your lifestyle later in life.

2. Risk Questionnaire—Allocation Tool One of the most important aspects of setting an investing strategy is choosing a stocks-bonds mix that jibes with your appetite for risk. Invest too aggressively, and you may end up selling stocks in a panic when the market dives. Invest too conservatively, and you may not earn the returns you need to achieve your goals. This questionnaire from Vanguard can guide you to an appropriate stocks-bonds allocation. Just answer 11 questions designed to probe, among other things, your investing habits and how you might react to major market setbacks, and you’ll receive a suggested mix of stocks and bonds (and, in some cases, cash). Click on the “other allocations link,” and you’ll get stats showing how your recommended portfolio as well as ones more aggressive and conservative have performed on average and in good and bad markets since 1926.

3. Retirement Income Planner (and Retirement Budget Worksheet) Estimating that you’ll need 80% or so your pre-retirement income after you retire may be okay for establishing a savings target during your career. But once you’re within 10 or so years of retiring, you want to get a better handle on what your actual retirement expenses might be. This interactive retirement budget sheet, which you’ll find within Fidelity’s Retirement Income Planner tool, will help you do just that. It not only has slots for 49 different expense items, ranging from cable and internet fees to health care and travel; it also allows you to check a box next to each expense designating whether it’s essential. The tool then provides a tally of all your expenses, plus a breakdown of essential vs discretionary ones. This can give you a sense of how much wiggle room you have to pare expenses if necessary, plus show you which areas are prime candidates for cuts. Of course, no level of detail will be able to sure 100% accuracy. But that’s not the goal. The point is to make the best estimate you can and then refine your budget (and your actual spending) as needed as you go along.

4. Financial Engines’ Social Security Calculator One of the single most important decisions retirees face is when to claim Social Security. Unfortunately, many retirees don’t give this issue the serious thought it deserves, and just take benefits as soon as they can (age 62) or soon thereafter. That can be a costly mistake. Each year you postpone benefits between age 62 and 70, your payment increases about 7% to 8%, dramatically boosting the amount you may collect during your lifetime. By taking advantage of a number of different claiming strategies, married couples may be able to boost their potential lifetime benefit several hundred thousand dollars.

Which is why in the years leading up to retirement, it’s a good idea to check out Financial Engines’ Social Security calculator. You just enter such information as your age, current income, the age at which you expect to begin collecting Social Security. The tool will then estimate the amount you’ll collect in today’s dollars over your lifetime if you claim benefits as planned—and show how much more you might collect by claiming at a different age. If you’re married, the tool will show how you and your spouse might maximize lifetime benefits by better coordinating when each of you claims. Another nifty feature: you can see how the projections changed depending on whether your life expectancy exceeds or falls short of average.

While this tool is a good way to start thinking about how and when you might claim Social Security benefits, the amount of money at stake is large enough that you may want to hire an adviser to help you with this decision or go to a Social Security claiming service, such as Maximize My Social Security or Social Security Solutions, that, for a fee, will help you devise a strategy.

5. Will You Have Enough To Retire? I know that no matter what I or anyone else says, some people simply aren’t going to spend more than a minute with any tool. If you’re one of those people—or you just want a quick update to see if you’re on the path to a secure retirement—this tool is for you.

Just enter your age, the age you expect to exit your job, the amount, if any, you have saved so far, the percentage of income you’re saving each year and the tool will immediately estimate the amount you’ll need at retirement and the amount you’re projected to have. At a glance, you can quickly see whether you’re likely to have an adequate nest egg if you continue on your current path. If it appears you’re falling short, you can see how your chances improve by, say, saving a higher percentage of pay or delaying retirement a few years (or both). My only gripe about this tool: I wish it couched its estimates in sustainable annual income in retirement rather than giving you your retirement “number.”

Are there other worthwhile free tools that can help you better plan for retirement? Sure, you’ll find at least a dozen more listed in RDR’s Retirement Toolbox, including one that will show you how much guaranteed lifetime income a specific sum of savings might generate, another that can help you decide between a traditional and Roth IRA and one that can help you compare the cost of living in different cities.

But to create an overall retirement strategy and monitor it to make sure you stay on track, you can start with these five.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More From RealDealRetirement.com

2 Ways To Get Guaranteed Income

Confused About Bonds? Here’s What To Do

How Much Can You Safely Pull From Savings Each Year?

TIME

This Is a Horrible Realization About Retirement

losing-money
Getty Images

This might make you lose hope entirely

Retire at 65? Yeah, right.

Multiple surveys reveal that Americans are getting increasingly jaded about their prospects for enjoying a relaxing retirement, so much so that many are throwing in the towel and not even bothering to plan for it at all.

According to a survey of 2,000 Americans conducted for Allianz Life, 84% of them characterize the idea of a retirement where they can do what they want as a “fantasy.”

A second study, this one from the TransAmerica Center for Retirement Studies, also finds that one in five Americans thinks they’ll have to keep punching the clock until they literally can’t work anymore, and 37% expect wages earned from working to be part of their “retirement” income. More than 80% of workers who have already hit the 60-year milestone expect to work past 65, already are or don’t plan to retire at all.

“Retirement has become a transition,” Catherine Collinson, president of the TransAmerica Center, said in a statement.

About two-thirds of Gen X’ers and half of Baby Boomers responding to the Allianz survey think the amount they’re expected to save will be impossible to reach.

Of the two groups, Generation X is the more cynical by far, even though they’re the ones with more time to plan for their retirements. (They’re also the group likely to have higher expenses, though, with obligations like mortgages like kids’ college funds and mortgages that aren’t on Boomers’ radar anymore.)

Only 10% of TransAmerica survey respondents who are in their 40s are “very” confident in their ability to live comfortably in retirement, and more than half of those in their 50s admitted to just guessing how much money they’ll need in retirement. More than two-thirds of Gen X’ers responding to the Allianz survey say they’ll never have enough money to retire, and more than 40% say it’s “useless to plan for retirement when everything is so uncertain.” More than half say they “just don’t think about putting money away for the future”

“Their hands-off approach to planning and preparation is alarming,” Allianz Life vice president of Consumer Insights Katie Libbe said in a statement accompanying the release of the survey.

That’s bad news. Gen X’s reputation for pessimism and angst is on full display in this survey, Libbe points out, and these character traits threaten to undermine their financial future.

Generation Y is more engaged, but they’re not doing so hot, either. The TransAmerica survey finds that young adults don’t have great expectations for retirement, either. More than 80% are worried that Social Security might not be there for them, and more than half aren’t counting on it to provide retirement income for them at all.

The good news is about two-thirds of twenty-somethings are already saving for retirement, but they might not be going about it in the most effective way, given that 37% say they know “nothing” about how they should be allocating their assets.

Still, their longer time horizon gives millennials the best shot at saving for a comfortable retirement, Collinson points out. “They can grow their nest eggs over four to five decades and enjoy the compounding of their investments over time,” she points out.

 

 

MONEY Ask the Expert

How the Social Security Earnings Test Could Wipe Out Your Income

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My wife and I had an appointment with Social Security today—she is 72, and I just turned 62. I know my benefits will be reduced by filing early at 62 but doing so would enable my wife to collect spousal benefits. She didn’t work enough to qualify for her own benefits, so I figured this would be the best way to maximize our benefits. But it turns out that I earn too much to get any benefits myself and, because of this, my wife can’t get any benefits, either! Everything I researched indicated that I would only be hit with a reduction while she would receive the spousal benefits. This whole system is just too complicated to really understand. —Lou

A: Lou has run into Social Security’s Earnings Test. These rules may seem benign, but as he found out, there are hidden snags that can seriously derail your retirement dreams.

The Earnings Test applies to people who take benefits before what’s called Full Retirement Age. This is 66 for most people now and gradually rises to age 67 for people born in 1960 and later years.

If you take benefits before your FRA, they will be reduced if you continue to work and your wage earnings are above two thresholds in 2015—$15,720 or, in the year you reach FRA, $41,880. These amounts are adjusted upward each year as average wages rise.

If you earn more than $15,720, your Social Security retirement benefits are reduced by $1 for every $2 your wage income exceeds that limit. For the higher income test, the reduction is $1 in benefits for every $3 you earn above $41,880.

As Lou found out, his income is so far above $15,720 that he cannot receive any Social Security benefits whatsoever. In its consumer notices, Social Security emphasizes that benefits forfeited by the Earnings Test are not truly lost. When a person who takes early retirement benefits reaches FRA, the agency will automatically restore the lost income by permanently increasing his or her monthly payment to make up the difference.

Well, that’s better than nothing. And perhaps Lou would have settled for a lower, postponed benefit – claiming at 62 reduces your payout by 25% vs filing at FRA—if it meant his wife could begin receiving spousal benefits.

But she won’t.

There’s no mention of this in the agency’s online explanation of the effects of the Earnings Test. But the agency brochure, How Work Affects Your Benefits, includes this eye-opener:

“If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too.”

So, not only does Lou earn too much money to get any benefits for himself, he also he earns too much money for his wife to qualify to receive any spousal benefits at all, as he discovered.

Lou doesn’t have any school-age children at home. But if he did, their benefits based on his earnings record would also be wiped out by the Earnings Test.

Here’s a sample provided by a Social Security spokesman that shows how the Earnings Test can affect family-member benefits.

“Mr. Doe is entitled to a Social Security retirement benefit of $378 [a month]. His wife and child are each entitled to a benefit of $160. Mr. Doe worked and had excess earnings of $2,094. These earnings are charged against the total monthly family benefit of $698 ($378 plus (2 x $160)). Therefore, no benefits are payable to the family for January through March (3 x $698 = $2,094).”

Got that? In this example, the test cancels out benefits for part of the year. In Lou’s case, of course, the benefits are wiped out for the entire year.

Under the rules, Lou’s lost benefits would be restored when he reaches his FRA in four years, as I mentioned earlier. And his wife’s lost spousal benefits would be restored as well, when she is 76.

But Lou and his wife are better off waiting four years to file, or at least until his earnings no longer cancel out their benefits. At 66, he can file and suspend his benefits. This will entitle his wife to a full spousal benefit equal to half his retirement benefit. He then can defer his own benefit for up to four years, allowing it to increase by an inflation-adjusted 8% a year.

I feel for Lou, and I fully agree with him that the system is too complex for the vast majority of Americans to understand. At the very least, the family-wide impact of the Earnings Test should be prominently featured in all Social Security materials mentioning this rule.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: This Little-Known Pension Rule May Slash Your Social Security Benefit

 

MONEY retirement planning

Answer These 10 Questions to See If You’re on Track to Retirement

railroad track
Getty Images

More Americans are confident about retirement—maybe too confident. Here's how to give your expectations a timely reality check.

The good news: The Employee Benefit Research Institute’s 2015 Retirement Confidence Survey says workers and retirees are more confident about affording retirement. The bad news: The survey also says there’s little sign they’re doing enough to achieve that goal. To see whether you’re taking the necessary steps for a secure retirement, answer the 10 questions below.

1. Have you set a savings target? No, I don’t mean a long-term goal like have a $1 million nest egg by age 65. I mean a short-term target like saving a specific dollar amount or percentage of your salary each year. You’ll be more likely to save if you have such a goal and you’ll have a better sense of whether you’re making progress toward a secure retirement. Saving 15% of salary—the figure cited in a recent Boston College Center for Retirement Research Study—is a good target. If you can’t manage that, start at 10% and increase your savings level by one percentage point a year, or go to the Will You Have Enough To Retire tool to see how you’ll fare with different rates.

2. Are you making the most of tax-advantaged savings plans? At the very least, you should be contributing enough to take full advantage of any matching funds your 401(k) or other workplace plan offers. If you’re maxing out your plan at work and have still more money you can save, you may also be able to save in other tax-advantaged plans, like a traditional IRA or Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible and, if so, how much you can contribute.) Able to sock away even more? Consider tax-efficient options like broad index funds, ETFs and tax-managed funds within taxable accounts.

3. Have you gauged your risk tolerance? You can’t set an effective retirement investing strategy unless you’ve done a gut check—that is, assessed your true risk tolerance. Otherwise, you run the risk of doing what what many investors do—investing too aggressively when the market’s doing well (and selling in a panic when it drops) and too conservatively after stock prices have plummeted (and missing the big gains when the market inevitably rebounds). You can get a good sense of your true appetite for risk within a few minutes by completing this Risk Tolerance Questionnaire-Asset Allocation tool.

4. Do you have the right stocks-bonds mix? Most investors focus their attention on picking specific investments—the top-performing fund or ETF, a high-flying stock, etc. Big mistake. The real driver of long-term investing success is your asset allocation, or how you divvy up your savings between stocks and bonds. Generally, the younger you are and the more risk you’re willing to handle, the more of your savings you want to devote to stocks. The older you are and the less willing you are to see your savings suffer setbacks during market downturns, the more of your savings you want to stash in bonds. The risk tolerance questionnaire mentioned above will suggest a stocks-bonds mix based on your appetite for risk and time horizon (how long you plan to keep your money invested). You can also get an idea of how you should be allocating your portfolio between stocks and bonds by checking out the Vanguard Target Retirement Fund for someone your age.

5. Do you have the right investments? You can easily get the impression you’re some sort of slacker if you’re not loading up your retirement portfolio with all manner of funds, ETFs and other investments that cover every obscure corner of the financial markets. Nonsense. Diversification is important, but you can go too far. You can “di-worse-ify” and end up with an expensive, unwieldy and unworkable smorgasbord of investments. A better strategy: focus on plain-vanilla index funds and ETFs that give you broad exposure to stocks and bonds at a low cost. That approach always makes sense, but it’s especially important to diversify broadly and hold costs down given the projections for lower-than-normal investment returns in the years ahead.

6. Have you assessed where you stand? Once you’ve answered the previous questions, it’s important that you establish a baseline—that is, see whether you’ll be on track toward a secure retirement if you continue along the saving and investing path you’ve set. Fortunately, it’s relatively easy to do this sort of evaluation. Just go to a retirement income calculator that uses Monte Carlo analysis to do its projections, enter such information as your age, salary, savings rate, how much you already have tucked away in retirement accounts, your stocks-bonds mix and the percentage of pre-retirement income you’ll need after you retire retirement (70% to 80% is a good starting estimate) and the calculator will estimate the probability that you’ll be able to retire given how much you’re saving and how you’re investing. If you’re already retired, the calculator will give you the probability that Social Security, your savings and any other resources will be able to generate the retirement income you’ll need. Ideally, you want a probability of 80% or higher. But if it comes in lower, you can make adjustments such as saving more, spending less, retiring later, etc. to improve your chances. And, in fact, you should go through this assessment every year or so just to see if you do need to tweak your planning.

7. Have you done any “lifestyle planning”? Finances are important, but planning for retirement isn’t just about the bucks. You also want to take time to think seriously about how you’ll actually live in retirement. Among the questions: Will you stay in your current home, downsize or perhaps even relocate to an area with lower living costs? Do you have enough activities—hobbies, volunteering, perhaps a part-time job—to keep you busy and engaged once you no longer have the nine-to-five routine to provide a framework for most days? Do you have plenty of friends, relatives and former co-workers you can turn to for companionship and support. Research shows that people who have a solid social network tend to be happier in retirement (the same, by the way, is true for retirees who have more frequent sex). Obviously, this is an area where your personal preferences are paramount. But seminars for pre-retirees like the Paths To Creative Retirement workshops at the University of North Carolina at Asheville and tools like Ready-2-Retire can help you better focus on lifestyle issues so can ultimately integrate them into your financial planning.

8. Have you checked out your Social Security options? Although many retirees may not think of it that way, the inflation-adjusted lifetime payments Social Security provides are one of their biggest financial assets, if not the biggest. Which is why it’s crucial that a good five to 10 years before you retire, you seriously consider when to claim Social Security and, if you’re married, how best to coordinate benefits with your spouse. Advance planning can make a big difference. For each year you delay taking benefits between age 62 and 70, you can boost your monthly payment by roughly 7% to 8%. And by taking advantage of different claiming strategies, married couples may be able to increase their lifetime benefit by several hundred thousand dollars. You’ll find more tips on how to get the most out of Social Security in Boston University economist and Social Security expert Larry Kotlikoff’s new Social Security Q&A column on RealDealRetirement.com.

9. Do you have a Plan B? Sometimes even the best planning can go awry. Indeed, two-thirds of Americans said their retirement planning has been disrupted by such things as major health bills, spates of unemployment, business setbacks or divorce, according to a a recent TD Ameritrade survey. Which is why it’s crucial that you consider what might go wrong ahead of time, and come up with ways to respond so you can mitigate the damage and recover from setbacks more quickly. Along the same lines, it’s also a good idea to periodically crash-test your retirement plan. Knowing how your nest egg might fare during a severe market downturn and what that mean for your retirement prospects can help prevent you from freaking out during periods of financial stress and better formulate a way to get back on track.

10. Do You Need Help? If you’re comfortable flying solo with your retirement planning, that’s great. But if you think you could do with some assistance—whether on an ongoing basis or with a specific issue—then it makes sense to seek guidance. The key, though, is finding an adviser who’s competent, honest and willing to provide that advice at a reasonable price. The Department of Labor recently released a proposal designed to better protect investors from advisers’ conflicts of interest. We’ll have to see how that works out. In the meantime, though, you can increase your chances of getting good affordable advice by following these four tips and asking these five questions.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More From RealDealRetirement.com

3 Ways To Prevent Lower Returns From Downsizing Your Retirement

How To Avoid Outliving Your Retirement Savings

3 Ways To Rescue Your Retirement If You’ve Fallen Behind

MONEY

Why It Pays to Delay Social Security Benefits

There's a flaw in the thinking that drives many people to start taking benefits early.

Social security is a great insurance policy. But sometimes people mistakenly regard it as just one more investment that they should try to maximize.

That kind of thinking might persuade you to take benefits sooner rather than later and can have a big impact on how much money you and your family receive.

Central to this problematic point of view is a breakeven analysis. Between the ages of 62 and 70, your benefits rise about 7% or 8% for each year you defer taking them. Wait until age 70, and your monthly benefit will be 76% higher, on an inflation-adjusted basis, than if you claimed at age 62.

Here’s the breakeven puzzle: Let’s say you wait to take Social Security so you can get a higher monthly benefit. How old will you be before the total value of your higher benefits catches up with the amount you would have received had you started taking Social Security years earlier?

Roughly calculated, the typical breakeven age is about 80½. Until then, you’ll get more money by taking benefits early. If you don’t spend those benefits but invest them instead, the breakeven age can be even higher.

So based on guesses about your lifespan and what you’ll earn by investing your benefits, you might think it best to take benefits early.

Why Breakeven Is Misleading

But this feels wrong to me. Once you start doing this breakeven analysis, you’re looking at Social Security as an investment on which you want to earn the highest return. And it isn’t an investment. Rather, Social Security is a gilt-edged insurance policy that protects you from a major risk: living a very, very long time—long enough to outlast your money.

Think about other types of insurance. You buy home insurance, for example, to protect against the possibility of damage or total loss.

If your home never burns down, is the money you spent on insurance premiums a loss? No. You pay for protection, not profits. That’s true for Social Security also.

The Ultimate Payoff

Social Security benefits are for as long as you live. The average 65-year-old will live about 20 more years; many people that age will live much longer (see the chart).

Source: United States Life Tables, 2010, Centers for Disease Control and Prevention (November 2014)

Those benefits are immune to a stock market collapse. They rise to offset inflation. While most 401(k) and traditional IRA distributions are fully taxable, no more than 85% of Social Security payments are subject to federal tax, and most states don’t tax Social Security.

Finally, waiting to receive a larger benefit means that survivor benefits based on your earnings will be larger too. That helps your surviving spouse (if your spouse isn’t collecting a larger amount based on his or her own work record). This is terribly important for women, who on average outlive their husbands and are more likely to need survivor benefits. Breakeven analysis can turn out to be a bad break for them.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY Generation X

Why Gen Xers May Be More Prepared for Retirement Than Boomers

alarm clock
Erik Dreyer—Getty Images

In the face of future hardship, some Gen Xers are actually improving their savings habits.

It is generally acknowledged that Gen Xers are hugely disadvantaged when it comes to retirement security. Gen Xers entered the workforce just as companies began to abandon traditional pension plans for 401(k)s, which shift the burden of saving and investing from the employer to the employee. And while baby boomers still stand to collect their full Social Security benefits, Gen Xers are retiring just as the program’s trust fund is forecast to run dry—around 2033, according to the latest report. That could cut their payout by about a third.

And yet Gen Xers have one big advantage over boomers: time. Not only do they have more working years left to save in those 401(k)s, but their investments have longer to grow tax-deferred. According to projections from the Employee Benefit Research Institute, both Gen Xers and Baby Boomers face significant deficits in the amount of money that they need to retire comfortably, but the more years workers keep contributing to a 401(k), the more those shortfalls decrease.

For example, a Gen Xer assumed to have stopped saving in a 401(k) faces a current shortfall of $78,297, while one with at least 20 years of continued contributions could find the average shortfall at retirement reduced to only $16,782. (EBRI’s retirement savings shortfalls are discounted back to a present value of retirement deficits at age 65.)

Other research suggests Gen Xers are fully aware of the challenges they face and are taking steps to overcome them. In a recent survey by PNC Financial Services, 65% of Gen X respondents said that they believed that they were solely responsible for their own retirement with no expectation of Social Security, employer pension or inheritance, while only 45% of boomers believed that they were solely responsible.

The PNC survey polled more than more than 1000 “successful savers”—those ages 35 to 44 had a total of $50,000 in financial assets, or at least $100,000 if age 45 or older. Compared to boomers, Gen Xers have more aggressive portfolios, are more heavily invested in stocks, and worry more that their savings may not hold out for as long as they live.

Even the financial crisis seems to have affected the two generations differently. When asked the ways in which their thoughts about retirement planning have changed over the last six years, 51% of Gen Xers said that they planned to save more to reach their goals, compared to only 37% of Boomers. And in what’s the most encouraging finding I’ve yet seen about Gen X, 28% said that they have increased the amount that they typically save and invest since the recession, as opposed to 22% of baby boomers.

In other words, the financial crisis seemed to have served as something as a wake-up call for Gen Xers. In the face of future hardship, some are actually adjusting their behaviors instead of burying their heads in the sand. Despite the odds stacked against them, Gen Xers just might get pushed into habits of thrift and rise to meet the financial challenges ahead. The good news: time is on their side.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read next: Why Wary Investors May Keep the Bull Market Running

MONEY Social Security

This Little-Known Pension Rule May Slash Your Social Security Benefit

teacher in lecture hall
Gallery Stock

If you are covered by a public sector pension, you may not get the Social Security payout you're expecting.

Some U.S. workers who have paid into the Social Security system are in for a rude awakening when the checks start coming: Their benefits could be chopped up to $413 per month.

That is the maximum potential cut for 2015 stemming from the Windfall Elimination Provision (WEP), a little-understood rule that was signed into law in 1983 to prevent double-dipping from both Social Security and public sector pensions. A sister rule called the Government Pension Offset (GPO) can result in even sharper cuts to spousal and survivor benefits.

WEP affected about 1.5 million Social Security beneficiaries in 2012, and another 568,000 were hit by the GPO, according to the U.S. Social Security Administration (SSA). Most of those affected are teachers and employees of state and local government.

These two safeguards often come as big news to retirees. Until 2005, no law required that affected employees be informed by their employers. Even now, the law only requires employers to inform new workers of the possible impact on Social Security benefits earned in other jobs.

The Social Security Administration’s statement of benefits has included a generic description of the possible impact of WEP and GPO since 2007; for workers who are affected, the statement includes a link is included to an online tool where the impact on the individual can be calculated. People who have worked only in jobs not covered by Social Security get a letter indicating that they are not eligible.

Many retirees perceive the two rules as grossly unfair. Opponents have been pushing for repeal, so far to no effect.

Why WEP?

To understand the issue, you need to understand how Social Security benefits are distributed across the wealth spectrum of wage-earners.

The program uses a progressive formula that aims to return the highest amount to the lowest-earning workers—the same idea that drives our system of income tax brackets.

It is a complex formula, but here is the upshot: Without the WEP, a worker who had just 20 years of employment covered by Social Security, rather than 30, would be in position to get a much higher return because of those brackets.

Where is the double dip? The years in a job covered by a pension instead of Social Security.

“If you had worked in non-covered employment for a significant portion of your career, there should be a shared burden between the pension you receive from that period of your employment and from Social Security in providing your benefit,” says SSA Chief Actuary Stephen C. Goss. “Just because a person worked only a portion of their career with Social Security-covered employment, they should not be benefiting by getting a higher rate of return.”

If you are already receiving a qualifying pension when you file for Social Security, then the WEP formula kicks in immediately. The SSA asks a question about non-covered pensions when you file for benefits, and it also has access to the Internal Revenue Service Form 1099-R, which shows income from pensions and other retirement income.

If your pension payments start after you file, the adjustment will occur then.

If you have 30 years of Social Security-covered employment, no WEP is applied. From 30 to 20 years, a sliding WEP scale is applied. Below 20 years, your benefit would drop even more. (For more information, click here.)

How does this affect your checks? The SSA offers this example: A person whose annual Social Security statement projects a $1,400 monthly benefit could get just $1,000, due to the WEP.

Your maximum loss is set at 50% of whatever you receive from your separate pension, so if that is relatively small, the WEP effect will be minimal.

You can still earn credits for delayed filing, and you will still get Social Security’s annual cost-of-living adjustment for inflation, but the WEP will still affect your initial benefit.

The WEP formula also affects spousal and dependent benefits during your lifetime. However, if your spouse receives a survivor benefit after your death, it is reset to the original amount.

Can you do anything to avoid getting whacked by WEP? Working longer in a Social Security-covered job before retiring might help. Remember, you are immune to the provision if you have 30 years of what Social Security defines as “substantial earnings” in covered work. That amounts to $22,050 for 2015.

So if you have 25 years, try to work another five, says Jim Blankenship, a financial planner who specializes in Social Security benefits. “That’s money in your pocket.”

Read next: The Pitfalls of Claiming Social Security in a Common-Law Marriage

Update: This story was updated to reflect that Social Security Administration gives little advance warning to beneficiaries, instead of no advance warning, and a description of Social Security benefits statements was added.

MONEY identity theft

Why We Need to Kill the Social Security Number

Social Security card with no number
Getty Images

SSNs were never designed to be a secure key to all of our personal data.

While tax season is still producing eye twitches around the nation, it’s time to face the music about tax-related identity theft. Experts project the 2014 tax year will be a bad one. The Anthem breach alone exposed 80 million Social Security numbers, and then was quickly followed by the Premera breach that exposed yet another 11 million Americans’ SSNs. The question now: Why are we still using Social Security numbers to identify taxpayers?

From April 2011 through the fourth quarter of 2014, the IRS stopped 19 million suspicious tax returns and protected more than $63 billion in fraudulent refunds. Still, $5.8 billion in tax refunds were paid out to fraudsters. That is the equivalent of Chad’s national GDP, and it’s expected to get worse. How much worse? In 2012, the Treasury Inspector General for Tax Administration projected that fraudsters would net $26 billion into 2017.

While e-filing and a lackluster IRS fraud screening process are the openings that thieves exploited, and continue to exploit, the IRS has improved its thief-nabbing game. It now catches a lot more fraud before the fact. This is so much the case that many fraudsters migrated to state taxes this most recent filing season because they stood a better chance of slipping fraudulent returns through undetected. Intuit even had to temporarily shut down e-filing in several states earlier this year for this reason. While the above issues are both real and really difficult to solve, the IRS would have fewer tax fraud problems if it kicked its addiction to Social Security numbers and found a new way for taxpayers to identify themselves.

Naysayers will point to the need for better data practices. Tax-related fraud wouldn’t be a problem either if our data were more secure. Certainly this is true. But given the non-stop parade of mega-breaches, it also seems reasonable to say that ship has sailed. No one’s data is safe.

Identity thieves are so successful when it comes to stealing tax refunds (and all stripe of unclaimed cash and credit) because stolen Social Security numbers are so plentiful. Whether they are purchased on the dark web where the quarry of many a data breach is sold to all-comers or they are phished by clever email scams doesn’t really matter.

In a widely publicized 2009 study, researchers from Carnegie Mellon had an astonishingly high success rate in figuring out the first five digits for Social Security numbers, especially ones assigned after 1988, when they applied an algorithm to names from the Death Master File. (The Social Security Administration changed the way they assigned SSNs in 2011.) In smaller states where patterns were easier to discern the success rate was astonishing — 90% in Vermont. Why? Because SSNs were not designed to be secure identifiers.

That’s right: Social Security numbers were not intended for identification. They were made to track how much money people made to figure out benefit levels. That’s it. Before 1972, the cards issued by the Social Security Administration even said, “For Social Security purposes. Not for Identification.” The numbers only started being used for identification in the 1960s when the first big computers made that doable. They were first used to identify federal employees in 1961, and then a year later the IRS adopted the method. Banks and other institutions followed suit. And the rest is history.

In fact, according to a Javelin Research study last year, 80% of the top 25 banks and 96% of the top credit card issuers provide account access to a person if they give the correct Social Security number.

There are moves to fix related fraud problems elsewhere in the world, in particular India where, in 2010, there was an attempt to get all 1.2 billion of that nation’s citizens to use biometrics as a form of identification. The program was designed to reduce welfare fraud, and according to Marketwatch, 160 similar biometric ID programs have been instituted in other developing nations.

In 2011, President Obama initiated the National Strategy for Trusted Identities in Cyberspace, a program that partnered with private sector players to create an online user authentication system that would become an Internet ID that people could use to perform multiple tasks and aid interactions with the federal and state governments. There may be a solution there — but not yet.

The first Social Security card was designed in 1936 by Frederick Happel. He got $60 for it. It was good enough for what it had to do (and was clear that the card wasn’t a valid form of identification). That is no longer the case. That card is nowhere near good enough. Perhaps one solution is a new card design — one with chip-and-PIN technology. Just how something like that might work — i.e., where readers would be located, who would store the information & support authentication, etc. — would have to be a discussion for another day.

The point is, we need to do something.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More from Credit.com

MONEY Ask the Expert

The Pitfalls of Claiming Social Security in a Common-Law Marriage

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q. I lost my WWII husband on January 14, 2014. It was a common-law marriage. I worked for over 50 years in the fields of education and medicine. However, many of the places where I worked did not have Social Security. I have turned in all the evidence required to prove that we presented ourselves as husband and wife. Texas recognizes common-law marriages. I am confined to a wheelchair. I served our country, as a civilian commissioned as a 2nd Lt., in the Air Force and Army overseas. Please help me as I am going to be homeless. – Joan

A. In the six weeks since Joan wrote me this note, she found a place to live. But she is no closer to resolving her problems with Social Security. It is easy to paint the agency as a heartless bureaucracy preventing an impoverished, 80-year-old veteran from getting her widow’s benefit. But there’s nothing about Joan’s story that is easy, and her problem is one that is becoming all too common.

Today more and more couples are living together without getting married, especially Millennials and Gen Xers. And many of them are having children and raising families. More than 3.3 million persons aged 50 and older were in such households in 2013, according to the U.S. Census Bureau.

There can be sound reasons for avoiding legal marriage. But when it comes to Social Security, you and your family may pay a high price by opting for a common-law union. Quite simply, it may be difficult, if not impossible, to claim benefits. And that can damage the financial security of your partner, children and other dependents. If you are in a common-law marriage, here are the three basic requirements for claiming benefits:

1. Your state recognizes common-law marriage. And yours may not. Only 11 states plus the District of Columbia recognize these marriages—among them, Colorado, New Hampshire, and Texas, which is Joan’s state of residence.

For your partnership to qualify, these states generally require that you both agree that you are married, live together and present yourselves in public as husband and wife. But the specifics of these rules are different in many states and usually complicated.

Social Security rules follow state laws when determining eligibility for spousal and survivor benefits. (The same policy applies to same-sex marriage.) If you do qualify, you will be able to receive the same benefits as you would with a traditional marriage, including spousal or survivor benefits.

2. You’ve got plenty of documentation. Social Security requirements for claiming survivor benefits call for detailed proof of the union. For an 80-year old, wheelchair-bound person like Joan, that’s a challenge to provide, especially in the case of a deceased spouse. Among other documents, she must complete a special form, plus get similar forms filled out by one of her blood relatives and two blood relatives of her late partner, John.

3. You’re prepared to fight bureaucratic gridlock. Joan has had multiple meetings with Social Security postponed for reasons she does not understand. She has been told she does not qualify as a common-law spouse under Texas laws. But the reasons she has been given may be incorrect. She says, for example, a Social Security rep told her that she and John needed to own a home to qualify. This is not true. She needs only to document that they lived as husband and wife and held themselves out to be married. Beginning in 2003, Texas made it harder for couples to qualify as common-law spouses, which could complicate Joan’s case.

Making matters even more difficult, Social Security has other convoluted rules that can change or even invalidate her benefits. Joan, it turns out, took a lump-sum payment from her government pension decades ago. That triggers something called the Government Pension Offset rule, which may prevent her from receiving a survivor’s benefit based on John’s earnings record. (For more on that rule, click here.)

Clearly, older Americans need more help than we’re giving them to navigate Social Security, Medicare, Medicaid and other highly regulated and complicated safety-net programs. This is hard stuff even for experts. It is not possible for the rest of us to understand without more knowledgeable assistance.

Meanwhile, for those in common-law marriages it’s important to plan ahead now. If you can’t qualify for Social Security benefits, you will need to save more while you’re still working. If your state does recognize common-law marriage, find out what documentation you’ll need, so you’ll have it when you file your claim. The last thing you’ll want to do in retirement is struggle with the Social Security bureaucracy.

“I am pushing 80 and this has been going on now for two years,” said Joan, a former special-needs educator, in a recent email. “I hope my health holds up as I have no life. What a way to treat an American citizen in a wheelchair who can teach the deaf to talk, the dyslexic to read and the stuttering to talk. I am just useless living in a room.”

Joan has another Social Security appointment scheduled this week.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The One Investment You Most Need for a Successful Retirement

Your browser is out of date. Please update your browser at http://update.microsoft.com