By Steve Garfink, International Living,

Everyone knows a little about Social Security. Yet what’s surprising is just how little we actually know—even at the very moment when we decide to start collecting our benefits. That would be fine if our ignorance didn’t cost us anything. But it does: an uninformed claiming strategy will likely cost tens of thousands of dollars for an individual and over $100,000 for a couple.

I spent most of my primary career in corporate finance and planning and I thought I was pretty smart about how financial programs work. Yet many years ago I began to do some retirement planning for my wife and me. When I looked at how Social Security would fit into this plan, I thought I already knew what I needed to know to do this. After all, I had been regularly receiving annual statements in the mail about my benefits from the Social Security Administration. (They rarely send these out anymore, a money-saving decision made some years ago.)

It turns out that what I knew was only a small piece of a much bigger—and more complex—picture. And it makes a good starting point for taking a more comprehensive look at what we all know—and don’t know—about our Social Security benefits.

Most of us know that we can start our benefits as early as age 62—and receive a smaller check—or we can wait as late as age 70 and get a bigger check; or we can start anytime in between and get a check somewhere in the middle. What difference does it make? It’s a wash either way, right? Isn’t that how they set the system up?

For most of us, one way will likely lead to tens (maybe even hundreds) of thousands of dollars in greater cumulative lifetime benefits. How can that be?

Consider two women, Janet and Grace: each just turned 62, each has $150,000 in total savings (conservatively invested to just keep up with inflation), and each is eligible to receive a $1,500 Social Security benefit if they start collecting now. They each find an overseas dream destination where they can live well on $1,500 a month.

They happen to cross paths 24 years later and compare notes. (They are each 86—which may seem old, but is the average life expectancy for a female who reaches age 62.)

During a conversation, Janet says: “I can’t believe how well my life has turned out. I took my Social Security at 62 and I continue to live quite comfortably on my $1,500 monthly check. Best of all, I have not needed to touch my nest egg which still retains its original $150,000 in purchasing value. I can’t imagine how things could have turned out better. How are you doing Grace?”

Grace pauses to respond, then says, “Well, I guess things turned out a little bit different for me. I waited to claim my benefit at age 70 and currently collect $2,640 per month…”

Janet interrupts: “But what did you live on before then? Your nest egg must be gone.”

“Not exactly,” Grace replies. “Actually, I currently have about $225,000 in my savings…”

Janet: “I don’t understand…”

Exactly: Janet did not understand. She knew she could get a smaller check at 62 or a larger one at 70. She did not understand what a huge difference her claiming decision could make on her long-term financial well-being.

While it is far too late for Janet to do anything about this now, we can learn from Janet’s case that claiming early can be very costly: for Janet, at her average life expectancy she is about $75,000 behind Grace in savings and collecting $1,140 a month ($13,680 per year) less.

For Janet, a little bit of knowledge proved costly indeed.

Tags: , , , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting