Most eligible retirees begin taking Social Security benefits upon reaching age 62, but is that really the best time for your client to start receiving his or her benefit?
According to a recent working paper on maximizing the present value of benefits by Economists John Shoven and Sita Nataraj, a critical factor in the decision of when to start collecting benefits is the current interest rate. When interest rates are low (3.5% or below), the benefit of delaying Social Security benefit generally outweighs starting benefits at age 62.
The Decision to Delay Social Security Benefits: Theory and Evidence
By John B. Shoven, Sita Nataraj Slavov
Issued in Febuary 2012
“Our simulations suggest that delaying is actuarially advantageous for a large subset of people. The gains from delaying are greater at lower interest rates, for married couples relative to singles, for single women relative to single men, and (at most interest rates) for two-earner couples relative to one-earner couples. In addition, within a married couple, the gains from deferring the primary earner’s benefit are greater than the gains from deferring the secondary earner’s benefit. We find that at relatively low interest rates (similar to those that prevail today), primary earners with average life expectancy should delay benefits to age 70 to maximize expected present value. Singles with average life expectancy should delay beyond their full retirement age as well.”
The paper also researched if there was a correlation between when people elect to start taking benefits and maximization of benefits. Little evidence was found to support that the start age decision was influenced by maximization factors, implying most people do not understand what start age is the most advantageous to receive maximum benefits.
Helping your clients make an informed decision as to when they should begin collecting Social Security benefits by evaluating the possible advantage of delay is a valuable service financial planners can provide.