Delayed claiming decisions will be based, in
part, on interest rates
Mar 6, 2019 @
11:22 am
I often get questions from people who were
born in 1960 or later about whether it would make sense for them to delay
claiming Social Security benefits beyond their full retirement age of 67. My
usual answer is I don't know. Much of that decision will be tied to prevailing
interest rates at that time.
Delaying Social Security benefits until age 70
has been a very valuable decision for many current retirees. They were able to
accrue delayed retirement credits worth
8% per year for every year they postponed collecting their benefits beyond
their full retirement age, up until age 70. Someone entitled to a full
retirement age benefit of $2,000 a month at 66 could increase their benefit by
32% over four years, to $2,640 per month, if they waited until 70 to claim the
benefit.
In reality, their future benefit would be even
larger because all the intervening cost-of-living adjustments from the time
they became eligible for Social Security at age 62 until they actually
collected them would be added to their base benefit amount. And many married
couples and eligible divorced spouses were able to claim benefits on their
spouse's or ex-spouse's earnings record between ages 66 and 70 while their own
retirement benefits continued to grow.
But the big reason that delaying Social
Security benefits until age 70 proved to be such a smoking hot deal was the
8%-per-year delayed retirement credit far outperformed all other risk-free
investments in the near-zero interest-rate environment that has existed over
much of the past decade.
The Federal Reserve's targeted interest rate
slid to a record low of 0.25% in December 2008 and remained near that level
through 2015. Although the Fed began tightening monetary policy in 2016, real
interest rates remain near zero, with the latest fed funds target of 2.25% to
2.5% about the same as the current rate of inflation.
But that was not always the case. Interest
rates climbed to a record high of 20% in 1980. Three years later, the
Bipartisan Commission on Social Security Reform recommended that delayed
retirement credits, which had been 3% per year, gradually be increased to
encourage Americans to wait to claim larger Social Security benefits in an era
of increasing longevity.
The first year that the 8%-per-year delayed
retirement credit took effect was 2009 — the same year the stock market hit its
lowest point during the Great Recession. A volatile stock market and record low
interest rates made the 8% per year credit appear even more attractive,
particularly as many baby boomers decided to remain in the workforce after
watching their 401(k) accounts plummet.
But will delaying Social Security benefits
always make sense? Maybe not. Between 1971 and today, interest rates averaged
5.69%, according to Fed data. If rates reach that level again, it may make more
sense to claim benefits at full retirement age, even if you don't need the
money, and bank the benefits, rather than risk dying before claiming them.
In the meantime, future retirees ponder their
future claiming strategies in an ongoing low-interest-rate environment.
"I was born in 1960, was the higher wage
earner and I am waiting until 70 to
max out my Social Security benefit," a reader from Florida wrote.
"My wife was born in 1962 and has her own
Social Security benefit that is greater than the spousal amount. When should
she begin taking her benefit?" he asked. "Should she wait until
70?"
"There are two reasons to delay claiming
Social Security until 70: to maximize a retirement benefit and to provide the
largest possible survivor benefit," I responded. "I generally think
it makes sense for one spouse — particularly the one with the higher benefit —
to delay claiming until 70. However, the other spouse may want to claim at full
retirement age or earlier as a way to bring some money into the household while
the other spouse delays. If nothing else, it will pay for your Medicare
premiums."
Another reader asked if a 63-year-old husband
could claim a spousal benefit from his 59- year-old wife and then switch to his
own record at 66.
No, for several reasons. The wife is too young
to claim Social Security and the husband can't restrict his claim to spousal
benefits on his wife's earnings record because of claiming rule changes adopted
in 2015.
Now only people who were born on or before
Jan. 1, 1954, have to right to claim spousal benefits on a mate's (or
ex-mate's) earnings record when they reach their full retirement age of 66.
This younger couple will never be able to choose which benefit to claim. They
will be paid the highest benefit to which they are entitled based on their age
at the time they file for Social Security.
https://www.investmentnews.com/article/20190306/BLOG09/190309958/future-retirees-ponder-social-security-strategies
No comments:
Post a Comment