A recent working paper from the National Bureau of Economic Research took a close look at when people should start drawing Social Security benefits, as well as whether the decisions people make match up with what theory says they ought to do.
What researchers found was a disconnect: It turns out that while many people should consider waiting to take benefits, few people make their decisions based on the most important factors.
The Take-Wait Trade-Off
Right now, you can start taking Social Security as soon as you turn 62. But there's a catch: If you take benefits at your earliest opportunity, you'll take a haircut on your monthly payment, getting 25% less than you would if you waited until your normal retirement age of 66. Taking benefits early also has an impact on how much your spouse will receive if your spouse gets payments based on your work record.
On the other hand, if you don't even need the money at age 66, you can put off starting to get Social Security until your 70th birthday. For each year beyond age 66 that you wait, your monthly benefits will get an 8% increase.
So there's clearly a trade-off. Wait longer and you'll eventually get bigger monthly payments, but you'll collect fewer months of benefits over the course of your lifetime. Start earlier and you'll get money faster, but in the long run, you could be worse off.
Key Factors to Consider
According to the study, current interest rates are the key to when most people should take Social Security.
When interest rates are low, the reward from getting higher monthly payments later is a lot greater than the value of getting income now, making it pay to wait. When interest rates are high, it makes more sense to get money sooner rather than later, even at the expense of getting smaller monthly payments. Right now, rates are low enough to make waiting the smart choice for most people.
In addition, family considerations -- whether you're married or not -- play a role.
At current rates, unmarried retirees should delay taking Social Security if possible, although the study found that men shouldn't wait until age 70 because of their shorter life expectancies. Married retirees, on the other hand, have a balancing act as one spouse may get payments based on the other spouse's work history. In general, for one-income families, interest rates have to be very high in order for it to make sense to take benefits sooner than later. In two-earner families, the person with the higher income should usually wait, while the lower-income spouse should take spousal benefits at normal retirement age.
This Is Not a Drill
In the real world, though, people can't look at Social Security as a theoretical exercise. The study found that retirees with higher levels of education tended to wait to receive payments, but that was often because they had more savings set aside and thus didn't need benefits as much.
In addition, your work status makes a big difference. More than 75% of early retirees took their benefits right at age 62. On the other hand, it usually doesn't make sense for people who are still working to take benefits before age 66, as your Social Security benefits get reduced by $1 for every $2 you make above $14,640 per year until the year you reach your normal retirement age.
What You Should Do
As with any study, this research gives broad guidelines, rather than specific advice. In particular, with the research based on actuarial statistics, it doesn't take into account any personal health issues you may have. In general, the longer you expect to live, the more it makes sense to wait.
As complicated as this question is, the key takeaway is to remember that taking Social Security isn't something you should decide on a whim. If you consider carefully all the trade-offs involved, you can make a decision that could mean thousands of extra dollars for you and your family.
When Is the Right Time for You to Start Taking Social Security?
There's something about life insurance that just freaks some people out. For one thing, it forces them to confront the notion of dying. For another, it demands they think about tomorrow when they don't know what to do about today. So instead, they stick their heads in the sand.
It's not surprising then, that according to the Life and Health Insurance Foundation for Education, 40% of adults in the U.S. have no life insurance.
Lack of knowledge fuels myths that take on a life of their own. Here are an even dozen myths and truths about life insurance.
Truth: Having a life insurance policy through work is a great benefit, but it's also temporary coverage. If and when you leave that company, the coverage will end. So it makes sense to explore a life insurance policy that will stay with you no matter where you work, says Greg Blake, executive director of life insurance product management at USAA.
An employer-paid policy typically offers a coverage amount equal to one's annual salary or a modest flat amount, says Butch Britton, CEO, ING U.S. Insurance (ING). That may prove insufficient: In addition to medical and funeral bills, your loved ones may need to pay off debts such as a mortgage and provide for other basic financial needs for years to come.
A good rule of thumb is that you might need 10 to 20 times your annual salary, and group benefits just won't get you there, says Brian Ashe, past chairman of LIFE.
Truth: In a study by LIFE and research and consulting firm LIMRA, 85% of participants said they thought coverage was too expensive. Not so, says Byron Udell, CEO of Accuquote.com, which helps people find affordable term insurance.
"The cost of simple level term insurance has come down by more than 60% in the past 16 years, so the prices today are so low, you can afford all you may ever need," says Udell.
In fact, a healthy 40-year-old nonsmoker can buy $500,000 dollars of life insurance coverage, with a premium guaranteed not to change for 20 years, for less than $31 a month (about a dollar a day). "So, forego the $5 coffee and other daily luxury purchases to have the funds to budget for the protection of your family's financial well being," suggests Udell.
Truth: Many life insurance companies are willing to sell policies to people with a range of common medical problems, says Udell.
In fact, some carriers even specialize in high-risk classes. Yes, the coverage will probably be more costly than it would be for someone in perfect health, but companies will work with you in order to accommodate your needs. "The key is to be truthful about your health upfront, says Udell.
Truth: Term policies, by definition, last for a certain period of time, so if you die after that period and don't renew your policy, it is not there anymore. The option that give the biggest bang for the buck is a combination of term and universal life, says Pete D'Arruda, founder of Capital Financial Advisory Group.
Term life insurance often gets more expensive as time goes on. Insurance companies make more money with term policies because most people don't die during the terms they are paying for, says D'Arruda. By contrast, he explains: "Universal life insurance is one investment in life that is guaranteed to pay off, and you always pay the same premium."
Term is perfect if one needs coverage for ten years or less, or when one has limited cash to dedicate to insurance. For estate planning, business planning or for longer term needs, one should consider cash value life insurance, says Bill Perryman, founder of Perryman Financial Advisory.
Know too, that the accumulated value in permanent life insurance grows tax-deferred. In other words, permanent life insurance protects your family in the event of your death, but it's much more than that: It's actually one of the most valuable assets in your financial portfolio, says Michael Ferik, senior vice president of individual life at Guardian Life Insurance, which offers its own take on insurance misconceptions at www.lifeinsurancemyths.com.
Glenn Stevick, assistant professor of insurance at The American College agrees, "Permanent insurance is not a ripoff."
Term insurance is less expensive than permanent insurance only when considering the out-of-pocket premium payments, says Mike Roscoe, senior vice president of innovation and actuary at The Hartford. For a long-term perspective, certain permanent insurance products can be much less expensive than term.
Truth: Even if you're not married and don't have children, you should still consider whether you need life insurance. Others may still depend on you, such as parents, and life insurance can cover expenses such as funeral arrangements and potential debts, explains Blake.
Truth: Lifestyle has a direct impact on life insurance premiums. Typically the healthiest individuals see the lowest premiums, but other factors that affect cost include lifestyle choices like smoking, as well as your occupation and hobbies, says Blake.
Truth: While insurance is a good idea for many people, those who have sizable assets and no debt or dependents may be better off self-insuring, says Frank Darras, a lawyer specializing in insurance.
Truth: The cost of personal life insurance is never deductible if you have an employer, says Darras. If the policyholder is self-employed and the coverage is used to insure the business, then the premiums are deductible on Schedule C of the Form 1040.
Truth: There's more to consider than a salary when it comes to determining how much insurance each spouse needs. Everything from housekeeping to extra-curricular activities would cost a family extra money if a non-employed parent was longer around to contribute.
"People don't realize is even if you're a stay-at-home mom or dad, you contribute to your family with the valuable services that you provide like cooking, cleaning and driving the kids around town. It all adds up! With more than one life insurance policy in place, your family would be protected if something devastating were to happen."
Just as important is the fact that often, the surviving spouse has a loss of income due after their partner's death. Parents often take time off work to be with their young children, which could negatively affect their careers. There is a financial cost, even if the deceased did not have any income.
Truth: You never know when your number will come up. When it does, you probably won't get a telegram warning you in advance, says Udell.
Life insurance, like all insurance, is the type of product you have to buy before you need it. That means the time to purchase life insurance is when you're young and healthy.
"If you wait, and you develop a serious medical problem, you may not be able to get the coverage you want. Further, even if you stay healthy, the rate for new life insurance is always based on your age ... even just one year older means higher rates," says Udell.
Truth: Permanent life insurance policies offer a number of "living benefits," including the ability to access the policy's cash value through withdrawals or tax-free loans for other needs, such as funding a child's education, a hard earned retirement or other lifelong savings need, says Ferik.
Truth: "You can't buy a policy and then just forget about it," says Dayle Axman, supervisor of life and health with the Department of Consumer Affairs in Colorado. "Things change. When you got the policy, maybe you had a young family. Twenty years later, your situation is likely very different. Review your policy periodically."
Know too, that positive changes in your health can sometimes lower your premiums, and policies with loans and withdrawals should be monitored, points out Ferik.
"Life happens -- a new family member, an inheritance, a promotion," says Ferik, "and you need to make sure your policy still fits."