Is age 70 the new 65 for retirement?

Due to increases in Social Security's delayed-retirement credit, the real retirement age is now 70, according to a recent research paper from the Center for Retirement Research at Boston College. Social Security benefits increase by 8% per year for every year a worker defers claiming benefits beyond full retirement age up to 70. For those whose full retirement age is 66, delayed-retirement credits can boost maximum Social Security benefits to 132% of the full retirement age amount if collected at 70. Although eligible workers can still claim benefits as early as 62, their benefits are reduced by 25%, trimming a $1,000 monthly benefit at 66 to just $750 if claimed at 62. Waiting until 70 to collect benefits increases the monthly amount to $1,320, plus any intervening annual cost-of-living adjustments.

POSTPONE CLAIMING

“Given that Social Security is a particularly valuable type of income — inflation-adjusted and lasts for a lifetime — it generally makes sense for workers to postpone claiming as long as possible to get the highest monthly amount, assuming they are in good health for their age,” Alicia Munnell, the center's director, wrote in the paper. “The level of monthly benefits at 70 appears appropriate, given the increased deduction for Medicare premiums, the greater taxation of benefits, the declining importance of the spouses' benefit and the diminished sources of other retirement income,” Ms. Munnell wrote. “In that regard, 70 has become the new 65.” But as most advisers know, there can be a world of difference between theory and reality. James Kinney, an adviser with Financial Pathways, wrote to me recently about crafting a Social Security-claiming strategy for a married couple where both spouses are highly paid, in reasonably good health and are retiring at 60.

"NO-BRAINER'

“It seems a no-brainer to have one delay benefits until 70,” he wrote. “But I am not convinced of the marginal benefit of two highly compensated spouses waiting until age 70 to collect.” Mr. Kinney argued that the second spouse, upon reaching full retirement age, would be better off collecting her own retirement benefits rather than filing a restricted claim for spousal benefits only, allowing her to collect half her husband's benefit amount and then waiting until 70 to collect her maximum retirement benefit. “While the later approach may be beneficial if they both live long lives, it will require spending more assets,” he said. “If one spouse dies, they will never benefit from delaying their Social Security, but they will have already spent down the assets needed for the higher benefit.” Another recent study, this one from the National Bureau of Economic Research, supports Mr. Kinney's approach. “In a two-earner couple, the gains from deferring the primary earner's benefit are greater than the gains from deferring the secondary earner's benefit,” authors John Shoven and Sita Nataraj Slavov wrote in their 2012 paper, “The Decision to Delay Social Security Benefits: Theory and Evidence.”

LOW INTEREST RATES

The authors also noted that low interest rates increase the present value of delayed retirement benefits. “Primary earners with average life expectancy should delay benefits to age 70 to maximize expected present value,” they wrote. Maximizing the retirement benefit of the primary earner has an added advantage: It locks in a substantial survivor benefit for the remaining spouse. “Thus, delaying the primary earner's benefit is equivalent to purchasing a second-to-die or joint-life annuity,” they wrote. Increasingly, consumers say that they expect their advisers to be well-versed in Social Security rules and would be willing to switch to another adviser if their existing one weren't up to the task. A recent online survey of 500 married couples 60 to 66 found that 46% of respondents said they would want their adviser to calculate their Social Security-timing decisions, up from 40% in a similar survey conducted two years earlier. In addition, 54% of the respondents said that they would look for another planner if theirs couldn't or wouldn't analyze the timing of when to elect Social Security benefits. That is up from 44% in the 2011 survey. Both surveys were conducted for Social Security Timing, a software application company that helps advisers devise appropriate claiming strategies for their clients.