Deciding when to sign up for Social Security could be the most important retirement decision you make. Social Security is the largest source of income for over half of retirees, and the age you begin receiving payments can vastly affect the amount of money you receive over your lifetime.
The Center for Retirement Research at Boston College published a paper describing unusual—but allowable—strategies future retirees can ponder before they sign up for their due. Here are some highlights.
Strategy 1: Borrow and Invest
If you sign up for Social Security at age 62, you receive reduced benefit payouts for life; that is, unless you can afford to pay the money back. If you return every cent you've already received—without interest—you can qualify for higher payments for the rest of your life. Feasibly, a Social Security recipient could invest the benefits, keep the earnings, and then pay back the "loan" from Uncle Sam. "This strategy is the same as receiving a zero-interest loan from Social Security," according to the BC paper.
A retiree who gets about $1,000 a month between ages 62 and 66, or $64,000 including annual cost of living adjustments, and achieves investment returns of 3 percent above inflation on that sum would have about $68,000 at age 67, making about $4,000 on the transaction, according to calculations by Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner for policy for the Social Security Administration. Of course, you could always lose the money in the stock market, or die soon after you pay the money back and come out behind.
Strategy 2: Claim Now, Claim More Later
A married worker with a retired spouse can claim a spousal benefit at full retirement age and then switch to his or her own benefit at a later date. This approach allows an employee to receive spousal benefit checks while still building up his or her own work record, which will result in bigger Social Security checks later.
For example, a couple both age 66 (their full retirement age) might be entitled to retirement benefits of $1,200 a month each if they retire now. She decides to retire and claim her $14,400 annual due right away. But he wants to keep working until age 70. In the meantime, he can apply for spousal benefits based on her work record—netting him $600 a month—and delay claiming benefits based on his own work history. If he doesn't claim his own benefit until age 70, he will get $1,585 per month, or about $19,000 more per year, according to calculations by Mauricio Soto, a research economist at the Center for Retirement Research at Boston College. This approach is only permitted for individuals who have reached full retirement age.
You can check out some more claiming strategies for couples here.
Strategy 3: Claim and Suspend
A spousal benefit is generally equal to half of the higher earner's due, although claiming it before full retirement age diminishes the amount of the benefit. A wife cannot claim a spousal benefit until her husband signs up for Social Security, and vice versa if a husband wants to collect based on his wife's record. But any worker can claim Social Security and then suspend payment. This way, a spouse without enough earnings to qualify for benefits can start receiving checks, while the other spouse continues to work longer to get higher Social Security payouts later.
Humberto Cruz, a Tribune Media Services columnist, and his wife, Georgina, plan to implement this strategy. Humberto will file for and immediately suspend his Social Security benefits at age 66, his full retirement age, in 2011. Georgina, who will be older than her full retirement age, can receive spousal benefits worth 50 percent of what Humberto would have received if he hadn't suspended his payments, which is a higher amount than she would get from her own work record. "I expect us to receive higher combined benefits over the long run, while protecting Georgina if I die first," Humberto wrote in a column early this year.
Depending on how long you live, all of these strategies could result in either higher or lower lifetime payouts. Waiting to sign up for Social Security can help ensure you against outliving your savings, but delaying is never a good idea if you're in poor health or otherwise think you won't live a long life. Here's some more information about how the timing of Social Security benefits and continuing to work can affect payments.
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