Rich Bean, President and CEO ofThe Retirement Advisorsin Manchester, NH, has spent more than three decades advising retirees from major employers including AT&T, Verizon, Lockheed, and Raytheon on how to protect and grow their income after leaving the workforce. In that time, few decisions have proven more consequential, or more frequently mishandled, than when to claim Social Security benefits.

The difference between claiming at 62 and waiting until 70 can exceed $100,000 in lifetime benefits for a typical retiree. Yet most people make the decision without running the numbers, and many do it under the mistaken belief that claiming early is always the safer choice.

Social Security benefits can be claimed as early as age 62, but doing so comes at a permanent cost. For every year a retiree claims before their full retirement age (FRA), which is 67 for anyone born after 1960, the monthly benefit is reduced by roughly 6.67 percent per year. Claiming at 62 instead of 67 produces a benefit that is 30 percent lower, every month, for the rest of the retiree's life.

The argument for early claiming typically centers on the break-even calculation: if you claim early and invest the payments, does the compounded value eventually exceed what you would have received by waiting? For most retirees, the math does not favor early claiming beyond the mid-to-late seventies, a threshold many people cross. According to the Social Security Administration, the average 65-year-old American can expect to live into their mid-eighties. A retiree who lives to 85 and claims at 62 instead of 70 will almost certainly have left a significant sum uncollected.

Bean works with clients approaching retirement to model both scenarios using their actual projected benefit amounts and realistic longevity assumptions. The goal is not to find a universal answer but to find the right answer for each household, because income sources, health history, and spousal benefits all change the calculus.

One of the least understood aspects of Social Security planning is the taxation trigger. Benefits are not automatically tax-free. Once a retiree's combined income, defined as adjusted gross income plus nontaxable interest plus half of the Social Security benefit, exceeds $25,000 for single filers or $32,000 for married couples filing jointly, up to 50 percent of the benefit becomes taxable. Above $34,000 for single filers and $44,000 for married couples, up to 85 percent becomes subject to federal income tax.

For retirees drawing from multiple income sources, crossing those thresholds is easier than it looks. A pension from a company like IBM or Comcast, combined with IRA withdrawals and even modest investment income, can push combined income well past the 85 percent threshold before Social Security payments are factored in at all. The result is that the monthly check a retiree planned on receiving is materially smaller than projected.

The strategy Bean uses to address this is income sequencing. By drawing down taxable accounts in the years before Social Security is claimed, retirees can reduce the balance generating taxable interest and dividends. Delaying Social Security to 70 simultaneously increases the monthly benefit and shortens the number of years during which the retiree is most exposed to the taxation threshold. The two moves work together to produce more after-tax income across a retirement horizon.

For married retirees, Social Security planning involves two benefit streams, not one, and the interactions between them are where most households leave money on the table. A spouse who earned less during their working years is entitled to a spousal benefit equal to up to 50 percent of the higher earner's full retirement age benefit. This spousal benefit does not increase with delayed claiming beyond FRA, which changes the optimal strategy for lower-earning spouses.

The higher earner's decision to delay to 70, however, carries a different implication. In the event of the higher earner's death, the surviving spouse steps up to receive the deceased spouse's full benefit, including any delayed retirement credits accumulated between FRA and 70. For a couple where the higher earner delays to 70, the survivor benefit is meaningfully larger than it would have been had that spouse claimed at 62 or 67. For couples with significant longevity on one side, this survivor protection is often the most important reason to delay.

Source: International Business Times UK