The market values $1 of inflation-protected income 20 or 30years in the future higher than $1 today.
Advisors who believe that investors are placing too high aprice on future real income are free to bet against the marketby trading inflation swaps, but clients should use a discountrate based on current pricing.
By delaying claiming from age 69 to age 70, the healthyclient may forego $30,000 in income for one year in order toreceive an additional $2,400 in annual income for life startingat age 70. What is the value of this income? Simply multiplythe survival probability by the present value of the payment.
The value of a monthly payment during the 75th year ofage for a male is about $2,250. It’s about $1,500 for his 85thyear and $470 for his 95th year. In total, the present value is$44,700, or nearly 50% higher than the income he gave up.
For a female, the present value is $48,500, or 62% higher.Put another way, the healthy female client can gain $18,500 inexpected retirement wealth by simply waiting a year to claim.
Women vs. Men
The previous example also illustrates an important point —Social Security income is more valuable for women than it isfor men. Why? Women live longer.
On average, they can expect slightly more than two yearsof additional payments in retirement. Women benefit morefrom delayed claiming and, conversely, suffer a greater loss inwealth from claiming early.
Many of the more advanced claiming strategies were eliminated in 2016 to limit opportunistic behaviors that impactedthe solvency of Social Security. However, differences in spousal incomes still present an important opportunity to increaseexpected lifetime income for lower-earning spouses. The benefit is even greater for lower-earning women who can expectto receive more in future benefits.
If couples have similar incomes, delayed claiming should bebased on a present valuation calculation. If they are healthy,both should likely delay to 70, although the calculation is mademore complex by the surviving spouse’s ability to claim theother spouse’s full benefit after death. If a spouse is unhealthy,it may make sense to claim earlier.
A lower-income spouse has the option to receive half ofthe benefit of a higher-earning spouse when he or she claimstheir benefit at full retirement age. This increases the present value benefit of delayed claiming for a higher-incomeworker, especially if the lower-income spouse is expected tolive longer.
Claiming early can be particularly harmful for a higherearner because it reduces income for both spouses over a lifetime, and harmful for a lower-earning spouse because he orshe forgoes the ability to receive the full 50% spousal benefit.Upon the death of the higher-earning spouse, the survivingspouse can receive the other spouse’s full benefit amount.
Social Security Basics
There are a few online resources to help clients understandwhat the best claiming strategy may be for them, such asmaximizemysocialsecurity.com.
Plus, the Social SecurityAdministration has an informative pamphlet that discussesthe important factors thateveryone should considerwhen thinking aboutwhat age to claimSocial Security retirement benefits.
This includes issuessuch as clients’ health,other retirement assets,whether they are married, andwhether they want to continue workingin retirement. See: www.ssa.gov/pubs/EN-05-10147.pdf
Claiming early can be
particularly harmful for
a higher earner because
it reduces income for both
spouses over a lifetime, and
harmful for a lower-earning
spouse because he or she
forgoes the ability to receive
the full 50% spousal benefit.