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Most Americans make the wrong decisions about claiming Social Security benefits, and they usually make the wrong decisions because they commit two key mistakes.
About 96% of Americans made less-than-optimum decisions about when to begin Social Security benefits, according to a study released earlier this year by United Income, a financial services firm. The average retiree gave up more than $100,000 of lifetime income, and many gave up significantly more guaranteed income, according to the study.
The most common mistake is to claim benefits too early. The other most frequent mistake, and a related one, is failing to coordinate benefit claiming decisions with a spouse. The harm from this mistake usually isn’t apparent until one spouse passes away. That’s when one Social Security check ends, and the surviving spouse must support the household on only one Social Security check.
You can avoid these mistakes and others if early in the retirement planning process you answer the question: How long will your retirement last? Or, to put it another way, how long are you likely to live?
Most people enter retirement either without seriously considering this question or with a significant misunderstanding of their likely life expectancy. That’s why many people make the wrong decisions about Social Security and other retirement issues.
People often look at the ages to which their parents and grandparents lived. Then, they’ll assume that they will live to roughly the same ages.
That’s a bad system. Insurance companies don’t put much emphasize on how long someone’s ancestors lived. Genetics and heredity are factors that influence longevity, but more significant influences are improvements in medical care, environment and lifestyle.
Another mistaken approach is to use as a benchmark the life expectancy for our age group that was estimated when we were youngsters.
The average life expectancy for an age group that was estimated at birth factored in that many people will pass away before reaching retirement age. The average life expectancy for the surviving members of the age group increases each year they live. Baby boomers who’ve made it to age 65 are likely, on average, to live into their 80s.
Another key point is that the average life expectancy for an age group means that half the members of the age group will live longer than the average. Of the half who live longer than the average, a meaningful percentage of them will live much longer than the average.
How much longer will the fortunate 50% live?
A man who is 65 years old today on average has a 22-year life expectancy. That means he has a 50% probability of living to age 87 or longer, according to the LIMRA Secure Retirement Institute. One in four men age 65 today are expected to live to age 93. Among women aged 65 today, one in four will live to age 96 or longer. Despite a narrowing of the gap in recent years, women still are likely to live several years longer than men in their age group.
Those in good health at age 65 need to add additional years to the estimates. The 65-year-olds in good health today are likely on average to live two to four years longer than the entire group. Also, data show that people with more education and higher lifetime incomes on average live longer than their full age group. So, if you’re in good health, have a college education (or beyond) and had an above average lifetime income, you should assume you’ll live years longer than your age group average.
Here’s why it’s important for married couples to coordinate their decisions. There’s a significant probability that at least one spouse will live beyond the average for the age group. In a married couple age 65 today, there’s a 75% probability at least one spouse will live to age 88 or longer. Age 93 for at least one spouse is a 50% probability for the couple, and there’s a 25% probability at least one spouse lives to 98.
When one spouse passes away, one Social Security benefit will end. The surviving spouse might have to live with only one Social Security check for a considerable time. In almost 75% of married couples, one spouse will outlive the other by at least five years. In about 50% of couples, the surviving spouse will live outlive the other by at least 10 years.
A long life expectancy is a financial risk that economists and financial advisors often refer to it as longevity risk. The longer you live, the more assets and income you need to pay your expenses during those additional years. Living longer than average life expectancy greatly increases the risk of exhausting your financial resources. Before making a decision about when to claim about Social Security benefits, develop a realistic estimate of your life expectancy.
The general rule is that for single people with an average or longer life expectancy, it’s better to wait to claim retirement benefits. Each year you wait increases the benefits by about 8%. That’s an 8% return on your money, and it’s both guaranteed and tax-free.
In most married couples, one spouse earned significantly more during the working years and will have a higher Social Security retirement benefit. For these couples, the best strategy usually is for the higher-earning spouse to delay benefits as long as possible. The other spouse can claim benefits earlier, and it might even make sense for the spouse with lower benefits to begin benefits as soon as allowed at age 62. That way, regardless of which spouse passes away first, the surviving spouse will have the highest Social Security benefit available to them.