Retiree’s Social Security Regret: Why Claiming at 70 Backfired

Claiming Social Security at age 70, typically touted as maximizing benefits, can backfire if unforeseen circumstances, such as unexpected expenses or health issues, necessitate accessing those funds sooner than anticipated. This highlights the importance of carefully considering individual circumstances and planning for contingencies when deciding when to claim Social Security.

Many retirees believe delaying Social Security until age 70 is a foolproof strategy to maximize their monthly benefits. However, a growing number are finding that this approach isn’t always the best fit, leading to significant regret. The common wisdom suggests that waiting until 70 guarantees the highest possible payout, but this strategy hinges on living a long and healthy life. When unexpected financial needs or health concerns arise earlier than anticipated, the delayed benefits become less advantageous, and the years spent waiting can feel like a missed opportunity. The decision to claim Social Security is deeply personal, and factors beyond simple maximization should play a crucial role in the decision-making process.

The Case for Delaying: A Double-Edged Sword

The primary reason retirees delay claiming Social Security until 70 is to take advantage of the delayed retirement credits. For each year you postpone claiming benefits past your full retirement age (FRA), which is 67 for those born in 1960 or later, you accrue these credits, increasing your eventual monthly payment by 8% annually. This can result in a substantial boost, making it seem like a financially sound decision. For example, someone entitled to $2,000 per month at their FRA would receive $2,640 per month by waiting until age 70—a 32% increase. However, this calculation assumes a long lifespan to recoup the benefits foregone during the waiting period.

“The general rule of thumb is that waiting until 70 is great if you think you’re going to live a long time,” financial advisor Eric “Ric” Edelman, Founder and CEO of Edelman Financial Engines, told Yahoo Finance.

The breakeven point, where the total cumulative benefits received by claiming at 70 equal those received by claiming earlier, typically falls in the late 70s or early 80s. Therefore, individuals who experience health problems or unexpected expenses earlier in retirement may find that they would have been better off claiming earlier, even with the lower monthly payment.

When Delaying Backfires: Unforeseen Circumstances

The article highlights several scenarios where delaying Social Security can backfire:

• Unexpected Health Issues: A sudden health crisis can lead to significant medical expenses, forcing retirees to tap into their savings or other assets. In such cases, having access to Social Security benefits earlier could have provided a crucial financial safety net. The potential need for long-term care is a particularly relevant concern, as these costs can quickly deplete retirement savings.
• Unanticipated Expenses: Life is unpredictable, and unexpected expenses can arise at any time. These could include home repairs, car troubles, or financial assistance for family members. Relying solely on savings while delaying Social Security can put a strain on resources, and the delayed benefits may not be enough to offset the accumulated financial pressure.
• Changing Lifestyle Preferences: Some retirees find that their priorities shift as they age. They may want to travel more, pursue hobbies, or spend more time with family. Delaying Social Security can limit their ability to enjoy these activities, as they may be hesitant to draw down their savings while waiting for the larger benefit.
• Inflation: While Social Security benefits are adjusted annually for inflation through the Cost of Living Adjustment (COLA), the actual impact of inflation can vary depending on an individual’s spending patterns. If inflation disproportionately affects essential expenses, such as healthcare or housing, the delayed, larger benefit may not fully compensate for the increased cost of living during the waiting period.
• Investment Returns: The decision to delay Social Security often involves weighing the guaranteed increase in benefits against the potential returns from investing those funds. If investment returns are lower than anticipated, the opportunity cost of delaying Social Security may be higher than expected. Conversely, poor market performance can also decimate an individual’s savings, leaving them wishing they had the guaranteed income stream from Social Security sooner.

The Importance of Individualized Planning

The key takeaway from the article is that there is no one-size-fits-all approach to claiming Social Security. The optimal claiming age depends on a variety of factors, including health status, financial situation, lifestyle preferences, and risk tolerance. It is crucial to carefully consider these factors and develop a personalized claiming strategy.

“It’s very specific to your own situation,” Edelman noted. “If you live a long time, then that’s great. But if you need the money, or if you want to enjoy the money…it might make sense to take it earlier.”

Financial advisors can play a valuable role in helping retirees navigate the complexities of Social Security claiming. They can assess an individual’s financial situation, project future income and expenses, and model different claiming scenarios to determine the optimal strategy. They can also help retirees understand the implications of factors such as spousal benefits, survivor benefits, and taxation of Social Security income.

Beyond Maximization: Quality of Life Considerations

While maximizing Social Security benefits is a common goal, it is essential to remember that retirement is about more than just money. Quality of life considerations should also play a significant role in the decision-making process. Some retirees may prioritize enjoying their retirement years while they are still healthy and active, even if it means receiving a smaller monthly benefit. Others may prefer the peace of mind that comes with having a guaranteed income stream, regardless of their health or financial situation.

Strategies for Mitigating Regret

Even with careful planning, it is impossible to predict the future with certainty. However, there are several strategies that retirees can use to mitigate the risk of regretting their Social Security claiming decision:

• Diversify Income Streams: Relying solely on Social Security for retirement income can be risky. Diversifying income streams, such as through pensions, annuities, or part-time work, can provide a buffer against unexpected expenses and reduce the pressure to delay Social Security.
• Maintain an Emergency Fund: Having a readily accessible emergency fund can help cover unexpected expenses without having to tap into retirement savings or Social Security benefits.
• Review and Adjust Regularly: Retirement plans should be reviewed and adjusted regularly to account for changing circumstances. This includes reassessing Social Security claiming strategies as needed.
• Consider a “Do-Over”: Social Security allows individuals to withdraw their application for benefits within 12 months of starting them. While you have to repay all benefits received, this allows you to re-apply later, potentially at a more advantageous age.
• Spousal Benefits Strategies: Explore claiming strategies that coordinate spousal and survivor benefits to maximize the overall household income. This can be particularly beneficial for couples with significant age differences or earnings disparities. A lower-earning spouse, for instance, might claim early to provide income while the higher-earning spouse delays to maximize their individual benefit and potential survivor benefit.
• Work During Retirement: Working part-time during retirement can provide supplemental income, allowing you to delay claiming Social Security without depleting your savings. Additionally, earnings from work may increase your future Social Security benefits, depending on your earnings history.
• Consider Healthcare Costs: Healthcare expenses are a major concern for retirees. Estimate your potential healthcare costs, including premiums, deductibles, and out-of-pocket expenses, and factor them into your Social Security claiming decision. Consider purchasing supplemental insurance or long-term care insurance to protect against catastrophic healthcare costs.
• Seek Professional Guidance: Consulting with a qualified financial advisor can provide valuable insights and personalized recommendations. A financial advisor can help you assess your financial situation, develop a comprehensive retirement plan, and make informed decisions about Social Security claiming.

Understanding Social Security’s Complexities

Social Security’s rules and regulations can be complex and confusing. Understanding the nuances of the system is essential for making informed claiming decisions.

• Full Retirement Age (FRA): Your FRA is the age at which you are eligible to receive 100% of your Social Security benefit. For individuals born between 1943 and 1954, the FRA is 66. For those born between 1955 and 1959, the FRA gradually increases to 67. For individuals born in 1960 or later, the FRA is 67.
• Early Retirement: You can claim Social Security as early as age 62, but your benefits will be reduced. The reduction is permanent and can be significant, especially if you claim several years before your FRA.
• Delayed Retirement Credits: For each year you delay claiming Social Security past your FRA, you earn delayed retirement credits, which increase your eventual monthly payment. These credits are applied until age 70.
• Spousal Benefits: If you are married, you may be eligible for spousal benefits based on your spouse’s earnings record. Spousal benefits can be claimed even if you have never worked or have a low earnings record. The maximum spousal benefit is typically 50% of your spouse’s primary insurance amount (PIA) if claimed at your FRA.
• Survivor Benefits: If your spouse dies, you may be eligible for survivor benefits. Survivor benefits can be claimed as early as age 60 (or age 50 if disabled) and can provide a significant source of income for surviving spouses.
• Taxation of Social Security Benefits: Depending on your income, a portion of your Social Security benefits may be subject to federal income tax. Some states also tax Social Security benefits. The amount of tax you pay depends on your combined income, which includes your adjusted gross income, tax-exempt interest, and one-half of your Social Security benefits.
• Earnings Test: If you claim Social Security benefits before your FRA and continue to work, your benefits may be reduced if your earnings exceed certain limits. In 2023, the earnings limit is $21,240. For every $2 you earn above this limit, your benefits will be reduced by $1. In the year you reach your FRA, a different earnings limit applies.

Case Studies and Examples

To illustrate the importance of individualized planning, consider the following case studies:

• Case Study 1: John, Age 62 John is 62 years old and recently lost his job. He is considering claiming Social Security early to help cover his expenses. However, he is concerned about the reduced benefit. After consulting with a financial advisor, John decides to take a part-time job to supplement his income and delay claiming Social Security until his FRA. This allows him to receive a higher monthly benefit and continue to work towards his retirement goals.

• Case Study 2: Mary, Age 65 Mary is 65 years old and in good health. She plans to continue working part-time for several years. She is considering delaying Social Security until age 70 to maximize her benefit. However, she is also concerned about inflation and the potential for unexpected expenses. After carefully weighing her options, Mary decides to delay Social Security until age 68. This allows her to receive a higher benefit while still having access to funds if needed.

• Case Study 3: David, Age 68 David is 68 years old and has been receiving Social Security benefits since age 62. He recently experienced a health crisis that required extensive medical treatment. He is now regretting claiming Social Security early, as he could have used the higher benefit to help cover his medical expenses. David learns about the option to withdraw his application for benefits and decides to repay the benefits he has received. He then re-applies for Social Security at his FRA, allowing him to receive a higher monthly benefit.

• Case Study 4: Susan and Tom, a Married Couple Susan and Tom are a married couple. Tom is 66 and still working, while Susan is 62 and retired. Susan could claim spousal benefits based on Tom’s record, but they are unsure of the best strategy. They consult a financial advisor who recommends Susan wait until her full retirement age to claim spousal benefits to maximize the amount. Tom plans to delay claiming his benefits until age 70. This strategy ensures the highest possible combined benefits for the couple, especially considering the potential survivor benefits for Susan if Tom were to pass away first.

The Role of Financial Planning Software

Numerous financial planning software tools can assist in modeling different Social Security claiming scenarios. These tools often incorporate factors like life expectancy, inflation, investment returns, and tax implications to project potential outcomes. By inputting personalized data, individuals can gain a clearer understanding of the long-term impact of different claiming decisions. However, it’s important to remember that these tools are only as accurate as the data inputted, and professional advice should be sought to interpret the results accurately.

Long-Term Care Insurance Considerations

The potential need for long-term care is a significant factor in Social Security claiming decisions. Long-term care expenses can be substantial, potentially depleting retirement savings quickly. While Medicare provides some coverage for skilled nursing care, it does not cover the majority of long-term care services.

Purchasing long-term care insurance can help protect against these costs. However, long-term care insurance can be expensive, and the premiums may increase over time. The decision to purchase long-term care insurance should be based on an individual’s financial situation, health status, and risk tolerance.

The Psychological Aspect of Social Security

The decision to claim Social Security is not just a financial one; it also has psychological implications. For some retirees, claiming Social Security represents a sense of accomplishment and financial security. For others, it can be a reminder of aging and the end of their working lives.

It is important to consider these psychological factors when making a Social Security claiming decision. Some retirees may prefer to claim Social Security early to enjoy the peace of mind that comes with having a guaranteed income stream. Others may prefer to delay Social Security to maintain a sense of control over their finances and to continue working towards their retirement goals.

The Impact of Legislative Changes

Social Security is subject to legislative changes, which can affect benefit levels and eligibility requirements. It is important to stay informed about these changes and to understand how they may impact your Social Security claiming decision.

For example, Congress could potentially raise the retirement age, reduce benefits, or change the way benefits are calculated. These changes could have a significant impact on future retirees, making it even more important to plan carefully and to seek professional guidance.

Conclusion

While delaying Social Security until age 70 can maximize monthly benefits, it is not always the best strategy. Unexpected health issues, unanticipated expenses, changing lifestyle preferences, and inflation can all undermine the benefits of delaying. A personalized claiming strategy that considers individual circumstances, financial situation, and quality of life considerations is essential. Consulting with a qualified financial advisor can provide valuable insights and recommendations to help retirees make informed decisions about Social Security claiming. It’s about finding the sweet spot between maximizing financial security and enjoying life to the fullest, rather than blindly chasing the highest possible number.

Frequently Asked Questions (FAQ)

1. What is the biggest risk of waiting until age 70 to claim Social Security?

   The biggest risk is dying before you break even on the increased benefits. If you have health issues or a shorter-than-average life expectancy, you may receive less in total benefits than if you had claimed earlier. Additionally, unforeseen expenses could arise that would have been easier to manage with earlier access to Social Security payments.

2. Can I change my mind after I start receiving Social Security benefits?

   Yes, under certain circumstances. You can withdraw your application for Social Security benefits within 12 months of starting them, but you must repay all benefits you have received. Alternatively, once you reach full retirement age, you can suspend your benefits and earn delayed retirement credits until age 70.

3. How does inflation affect my Social Security benefits?

   Social Security benefits are adjusted annually for inflation through the Cost of Living Adjustment (COLA). The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). While COLA helps maintain purchasing power, the actual impact of inflation can vary depending on an individual’s spending patterns. If healthcare or housing costs rise faster than the COLA, retirees may still experience a decline in their standard of living.

4. If I’m married, how does my claiming decision affect my spouse?

   Your claiming decision can significantly affect your spouse, particularly in terms of spousal and survivor benefits. If you claim Social Security early, your spouse’s spousal benefit may be reduced. If you die before your spouse, your spouse’s survivor benefit may also be affected. Coordinating claiming strategies with your spouse is essential to maximize the overall household income.

5. What if I continue to work while receiving Social Security benefits before my full retirement age?

   If you continue to work while receiving Social Security benefits before your full retirement age, your benefits may be reduced if your earnings exceed certain limits. In 2023, the earnings limit is $21,240. For every $2 you earn above this limit, your benefits will be reduced by $1. The year you reach full retirement age has a different, higher earnings limit, and starting the month you reach full retirement age, there is no earnings limit. The amounts withheld will be credited back to you in the form of a higher monthly benefit after you reach full retirement age.