By Amitrajeet A. Batabyal
Most working Americans have two retirement assets. These are their defined contribution plan, such as a 401(k) or 403 (b), and Social Security. Having contributed a non-trivial fraction of their paychecks to Social Security over many years, the vast majority of Americans begin collecting benefits as early as possible, which for most is at age 62. When this kind of a collection strategy is employed, the only use to which one’s defined contribution plan balance can be put is to supplement the monthly Social Security income.
Interesting new research by economists John Shoven and Sita Slavov shows that this common strategy is a huge mistake that can cost as much as $250,000 for some Americans. Therefore, I contend that readers ought to seriously consider deferring their collection of Social Security.
To see why, consider the impact of timing. Most Americans will benefit by not collecting Social Security at age 62 but, instead, collecting it either when they reach their full retirement age or when they reach age 70. How much will they benefit? Deferring Social Security from age 63 to 66 results in benefits that are at least 25 percent higher per month and deferring collection from age 62 to 70 results in benefits that are at least 76 percent higher per month. In other words, the numerical differences in monetary benefits arising from waiting to collect are substantial.
Married couples can take advantage of this general “gain from waiting” strategy in other ways as well. This stems from the Social Security Administration’s rule that the benefits to the survivor of a couple will be based on the higher individual benefit amount for the couple, irrespective of who the surviving member is. So, suppose that the woman in a married couple has the higher individual Social Security benefit amount. Then, that benefit will be received by her widower if she dies before her husband. The point to note is that raising the higher benefit by delaying collection of Social Security results in higher benefits for both lifetimes. In contrast, raising the lower Social Security benefit through deferral only raises the couple’s income until the first death.
The research shows that in addition to the above points, there are other measures that one can take to maximize one’s post-retirement income. This notwithstanding, the key summary point is that the best way to use the balance from one’s defined contribution plan is not to supplement Social Security but to finance its deferral. But what about Americans who cannot afford to live off their defined contribution plan balance while waiting to collect Social Security? Unfortunately, the only way for such people to take advantage of the substantial benefits of Social Security deferral is to work longer.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.