Not long ago, financial advisers took Social Security for granted and offered most people the same advice -- take it as soon as possible. They used the break-even point as an argument for this strategy. The theory went that the age where you would make more by delayed filing is actuarially somewhere in your early 80s. Most people don't live that long, they theorized, so delaying meant that you would collect less overall than you would have gotten if you had taken Social Security at 62. This is especially true if you consider the time value of money, which takes into account how much you could earn in interest over time.
That theory is out of date, James Mahaney, vice president of strategic initiatives for Prudential Financial, told attendees at a presentation offered by Prudential for retirement advisers. "The real risk today is living longer and living beyond your life expectancy," Mahaney said.
Another game changer, Mahaney says, is the number of women who have earned Social Security benefits in their own right. Understanding how to use the joint Social Security filing strategies available to a married -- or even a divorced -- couple can raise payouts significantly and be key to a much richer retirement, says Mahaney, author of the Prudential white paper, "Innovative Strategies to Help Maximize Social Security Benefits."
Add to this the need to understand how Social Security impacts taxes. Dated retirement planning strategies usually advised taking Social Security early so that money in tax-advantaged accounts can go untouched for as long as possible. But tax situations today aren't that simple, Mahaney says. Often it makes more financial sense to develop a strategy that involves spending taxable savings first in order to delay taking Social Security as long as possible and allowing its value to grow. Delayed income credits combined with cost of living adjustments can easily double a Social Security payout.
These factors, combined with the reality that most people will retire without another predictable source of regular income other than Social Security, has dramatically increased its importance. "No other program can match Social Security for its ability to fight inflation, provide longevity protection, shelter income from taxes and guarantee spousal coverage," Mahaney says.
Prudential often hears its younger clients dismiss the importance of Social Security and say they don't ever expect to collect. Mahaney thinks that attitude is seriously misguided. "People have to understand the complexity of this benefit and just how rich it is, so they can fight to keep it," he says.