Many retirees can secure outsize returns simply by delaying Social Security benefits to the maximum age of 70, rather than starting at 62, the minimum and most common starting age. For couples, in particular, getting the timing right could be worth an extra $250,000 or more.
Deciding to delay Social Security payments is a lot like buying an insurance product called a second-to-die annuity, in which savers can set aside money today to pay for a future stream of lifetime income for two. But in this case, the "insurance company"—Social Security—is giving away the store, because it hasn't adjusted its prices much since the 1950s, even though life expectancies have soared since then.
Full retirement age is 66 to 67 for those born in 1943 or later. At that age, workers may collect their primary insurance amount, or PIA, based on past earnings. Early filers can start drawing benefits at age 62, though they'll receive only 75% of their PIA. If retirees wait until age 70, they can collect 132% of their PIA.
Determining the financial return for waiting is complex, because those who start payments later collect fewer of them, and forgo interest on the payments they miss. Marital status, income, health and other factors play a role.
Married couples get the sweetest deal, says John Shoven, a Stanford University professor and Social Security expert, because when one spouse dies, the other collects the higher of the two benefits. That means the higher earner's benefits could extend beyond his or her death. By Mr. Shoven's math, the return for waiting is often 5% to 6% a year for higher-earning spouses. The best comparison is with Treasury inflation-protected securities, which are government-backed and adjusted for inflation, like Social Security. Ten-year TIPS recently yielded 0.6%.
For lower-earning spouses, the return for deferring payments is 1% to 2% a year, reckons Mr. Shoven. Couples who need the cash should try to get by on other savings and the smaller benefit while deferring the larger benefit.
For single people, the return for waiting is often in the 2.5% to 3% range. Women get a better deal than men because they live longer. Health matters. But remember, the larger benefit for a married couple lasts for two lifetimes, so a fit wife can make up for a worse-for-wear husband.
Couples can even collect cash while they defer benefits using a tactic called "file and suspend." A higher-earning husband, say, may file for benefits at full retirement age in order for his wife to qualify for spousal benefits, then immediately suspend his own benefit so it continues to grow.
President Barack Obama's 2015 budget "proposes to eliminate aggressive Social Security claiming strategies," perhaps a reference to file-and-suspend for two-income couples. But workers nearing retirement now can get a plum deal.
All of this depends upon Social Security remaining solvent. Its trustees say there's enough money to pay full benefits through 2033 and three-quarters benefits thereafter. Changes for future retirees, like higher retirement ages, could offset any shortfalls. For an estimate of benefits based on earnings records, see ssa.gov/estimator. Also, MaximizeMySocialSecurity.com sells $40 planning software and gets good reviews.