With the demise of guaranteed pensions, and in light of the risks you face in managing your own retirement assets, maximizing Social Security becomes a critical part of retirement planning.
How claiming age affects the income stream
One of the most important decisions a retiree faces is when to apply for Social Security benefits. This is not a decision to be made lightly; the lifetime, inflation-adjusted income promised by Social Security makes it one of a retiree’s most significant assets.
If you were to calculate the present value of the Social Security income stream, it would rival or exceed the
lump sum many people have in their 401(k) plans at retirement. Serious investors work hard to maximize the value of their IRAs and 401(k) plans, often not realizing that their Social Security “asset” can be maximized as well. Pre-retirees can enhance its value by building a strong earnings record and applying for benefits at the optimal time.
Let’s say you have a primary insurance amount (PIA) of $2,500. This is the amount of monthly income you will receive if you apply for Social Security at your full retirement age. Full retirement age is 66 for baby boomers born between 1943 and 1954, gradually increasing to 67 for those born later. Let’s also say you have a life expectancy of 86. This is slightly longer than the average life expectancy, but there’s a good chance you or your surviving spouse will live at least that long.
If you apply for Social Security at 62, your benefit will be reduced to account for those five extra years of checks. If your PIA is $2,500, your permanent benefit would be $1,750, which is 70% of $2,500. If you apply for benefits at 70, your benefit will get a boost of three years of 8% annual delayed credits, giving you a permanent benefit of $3,100 a month.
Now let’s see what the lifetime value of your Social Security income stream would be depending on when you start your benefit.