When you claim Social Security, don’t make this one really, really dumb move
Nearly half a million of you will probably start claiming Social Security this month.
But if experts are to be believed, thousands — and perhaps tens of thousands — of you will make a significant blunder when you do. You’ll end throwing away a chunk of money for no good reason.
Naturally it’s your money, and if you want to throw some of it away that’s up to you. If it ends up saving the overall Social Security trust fund some cash, well, that’s great news for the rest of us. The fund could do with the help.
But, all things considered, you may not be intending to make this gift to the rest of the country. You may not want to be poorer than you had to be in old age.
So what’s the mistake? It’s starting to collect Social Security early…while at the same time either buying a private annuity, or taking an annuity from your company pension plan instead of a lump sum.
Sure, some people insist on taking Social Security early. And yes, many financial experts argue that it can be a smart move to get a private annuity when you retire.
The biggest problem isn’t with doing one or the other. It’s with doing both at the same time.
It’s a slam dunk, say researchers. Most people who do both “are making a mistake,” missing out on “an unambiguous arbitrage opportunity,” and “leaving money on the table,” according to calculations by economists Gila Bronshtein, formerly at Stanford University and now at Cornerstone Research, Jason Scott at financial advisers Financial Engines, John Shoven at Stanford, and Sita Slavov at George Mason University.
The numbers may be enormous. “Several hundred thousand, perhaps millions, of households” are making this mistake, they argue. They estimate the figure could be somewhere between 5% and 18% of claimants. Losses vary wildly per household, but can range “up to $250,000,” they calculate.
Even without heroic assumptions, the losses per household are often many thousands of dollars. “We believe…individuals and employers are simply making a mistake when it comes to these complex pension income decisions,” they write. “Of the 12.5 million married men over the age of 65, we estimate that between 650,000 and 2.25 million” made this mistake.
Yikes.
Why is it a mistake? That’s because the later you start claiming Social Security, the more valuable it becomes. “Delaying Social Security is equivalent to purchasing an inflation-indexed life annuity,” note Bronshtein and her co-authors. So it usually makes more sense to take cash now from other sources, and delay getting your checks from Uncle Sam, than it does to start getting checks from Uncle Sam now and simultaneously buy a private annuity.
In numbers: You can start claiming Social Security at 62. For each year you delay, the annual payment you’ll get rises by around 8%. If you wait until 70, when it maxes out, you’ll be getting about 75% more a month than those who started claiming at the earliest age. (Those payments also come with annual inflation adjustments and survivor benefits: Those who are married have an even greater incentive to wait than those who are single, say experts.)
Yes, claiming early makes sense if you don’t plan to live very long. But most claimants will live into their 80s, say government mortality statistics. By the end they’ll be well ahead of the game.
About a third of those eligible start claiming Social Security at the earliest age possible, despite the long-term costs. There are many reasons, say analysts. One of them is, quite simply, that some people need the money. But if they are simultaneously buying an annuity, it makes no sense.