THE SOCIAL SECURITY claiming decision is one of the most complex—and contentious—choices that retirees have to make.
I was reminded of that in December, while at a Christmas party. Two former colleagues were discussing their Social Security decision. Both are male, single, childless, retired engineers. Each has a traditional pension, a paid-off home and significant retirement savings. Ted is age 77. Fred is 66.
Ted took his Social Security at 62. His reason was longevity or, rather, the lack thereof. He had been a smoker for many years. He calculated his breakeven age as 77, at which point he would get back as much as he’d paid into the system. He decided to collect a lower benefit as early as allowed and then invest the money. Ted lives frugally, and will leave a handsome legacy to his nieces and nephews.
Fred is waiting until age 70 to collect. He’s in generally good health, and family history suggests he could live a long life. Although retired, he does some consulting for his former employer. It provides mental stimulation, while covering the extras—travel, electronics, cigars, wine—in his budget. If you’re younger than your full Social Security retirement age, which is 66 or 67, depending on the year you were born, Social Security has rules limiting how much you can receive if you’re also earning an income. Since Fred hasn’t yet reached his full retirement age, his benefit would be reduced if he claimed early. That was another reason he decided to wait.
In short, here we have two retirees in fairly similar situations who made entirely different choices based on their circumstances. Still, unlike many retirees, they’re fortunate: Both have the financial wherewithal to make taking Social Security an option, not a necessity.
Many retirees have no choice but to start Social Security as soon as possible. My parents fit that description. Serious health problems prevented them from accumulating any retirement assets, other than minimal equity in their home. Once they stopped working, their Social Security checks were their only income.
I’ve studied this topic from half-a-dozen different angles, and I’m still not 100% sure what my wife and I will do. I turn age 65 in September. My wife will be 64 in March. Although my lifetime earnings were higher, my wife’s benefit is 86% of mine. I’ve tried to build a logical framework to help us make the right choice. If you’re facing a similar decision, here are some key considerations:
Marital status. If you’re married, upon the death of the first spouse, the surviving spouse typically continues to receive the larger of the couple’s two benefit checks. One strategy we’re considering: Have my wife claim her lower benefit at her full retirement age, while I delay until 70, when I’d get my maximum benefit. That way, my wife would receive my higher benefit as a survivor benefit, should I predecease her.
This is a strategy that could help many married women, who typically have lower lifetime earnings but often live longer than their husbands. According to the Social Security Administration, women reaching age 65 in 2019 typically outlive men by 2½ years. In 2019, the average annual benefit received by women 65 and older was $13,505, compared to $17,374 for men.
Spousal benefit. A spouse may be eligible to receive up to 50% of the other spouse’s benefit, even without a work history. The tricky part: The spouse who was the main breadwinner must begin benefits before the other spouse can claim spousal benefits. This creates an incentive for the higher earner to claim benefits no later than when the lower-earning spouse reaches his or her full retirement age. If the lower-earning spouse delays receiving benefits beyond his or her full retirement age, there’s no further increase in the spousal benefit.
Longevity. Singles have a simpler choice. If you have health issues, or your family hasn’t been blessed with long lives, you may want to claim your retirement benefit as soon as eligible.
For married couples, it’s more complicated. If the higher-earning spouse is also the spouse with lower expected longevity, there’s still an argument for delaying benefits—because the other spouse could receive that larger benefit as a survivor benefit.
Nest egg. If you have no other sources of income, you may be compelled to start benefits earlier. Fortunately, my wife and I have the necessary savings, along with my pension, to cover the five-plus years until I reach age 70. Thereafter, our combined Social Security benefits and my pension should cover our expenses, and allow our portfolio to continue to grow.
There are tools available to help you with the choice. The Social Security Administration provides a portal where you can create your own Social Security account. It will show what you’d receive at your full retirement age, plus estimate your benefit at 62 and 70.
Another useful tool is financial writer Mike Piper’s Open Social Security. It’s a sophisticated calculator that allows you to investigate a variety of scenarios and options. Open Social Security scores each scenario by calculating the lifetime benefits it would produce. The tool generates a heat map that lets you easily compare each scenario to the optimal payout. I found this useful in understanding our situation. It showed the value of my waiting to claim until 70, and that my wife’s claiming choice had much less impact.
For example, the optimal scenario recommended that I claim at age 70, and my wife at 65 and four months. That produced a present value average of $1.4 million in benefits over our lifetimes. If my wife claimed a year earlier, it would reduce our total benefits by only 0.1%. If she waited until she was 70, the total is reduced by 1.3%.
On the other hand, if I claimed at my full retirement age of 66 and six months, and she waited until 70, our lifetime total was reduced by 5.2%. If we both claimed at our full retirement ages, the total is reduced by 7.2%. These numbers support our plan to leave my benefit to grow until age 70. Meanwhile, we have about 18 months until we reach the optimum claiming date for my wife. A lot, of course, could happen between now and then—and that could prompt us to change our plans.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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Question, what if one spouse is collecting disability before FRA, how does that spouses FRA numbers calculate once they reach their FRA? Does disability cease at FRA and they do they have a choice to delay SS benefits to 70? How does that spouses SS figure into the higher spouses SS benefits if that spouse is eligible to collect SS benefits because they are older?
I found another question under Kotlikoff’s site that addresses this. It references a section of the SSA POMS that answers the question.
Here is one resource I found. The basic rule seems to be that SSDI turns into a retirement benefit at FRA. The benefit is likely to stay the same, but there are some nuances.
This reference from ssa.gov explains about suspending retirement benefits to get additional credits up to 70. I don’t see where it says anything restricting someone who had been receiving SSDI and converted to retirement benefits.
Larry Kotlikoff’s Maximize My Social Security has a website where you can ask him questions. I saw a few questions similar to yours. This question and response indicates you can collect SSDI, convert to Retirement benefits, then suspend until 70 and earn additional credits.
You have to deal with a number of variables. You and your spouses health. Longevity history of your families,etc.. Everybody keeps talking about waiting till your 70, but who says you’ll live that long. My wife started at age 62,so she got more over time than waiting until 70. She passed at 73, so waiting wouldn’t have worked. Everybody keeps talking like they know, but nobody knows for sure. As I have said before, this is an individual’s decision on when to take SS. You have to look at your specific circumstances and then make your decision. There’s no right way that covers everything or situation.
I am sorry for your loss. Many large studies have shown that family longevity doesn’t contribute a great deal ( 30% at most ) to the estimate of an individual’s longevity , so I agree – no one knows. As someone who prepares genealogy charts, I would concur with the scientific studies.
Spousal benefits are one-half of the other spouses FRA. Survivors benefits are the full amount of what the other spouse was receiving, including any increased amount up to the age 70 limit.
Actually, spousal benefits are “up to” one-half of the other spouse’s FRA amount. The spouse actually has her/his own worker benefit if she/he worked for the minimum amount of time and then a spousal benefit on top of it for a TOTAL OF up to one-half of the higher earning spouse’s benefit. Example: John has $2000 monthly benefit at his FRA. Suzie, his wife, has a $600 worker benefit. In this case, her spousal benefit is $400 if she starts at her FRA. This can be an important distinction since these benefits can sometimes start at different times for Suzie. She might claim the $600 worker benefit at a reduced amount at age 62 and then claim a spousal benefit at her FRA when John files and triggers Suzie’s eligibility for the spousal benefit. Two parts for Suzie – her own worker benefit (which was reduced for claiming early) and a spousal benefit (which was not reduced).
It is my understanding that SS survivor benefits are capped at the deceased FRA (DOB 1957 FRA 66.5 yr) and wouldn’t increase for my surviving spouse by delaying claiming beyond my FRA. She would be eligible for my benefit at her survivor FRA (66yr 2mo). Thank you for reply if I’m incorrect.
Your spouse is potentially eligible for your full benefit, including any increase in that benefit because you delayed beyond your full Social Security retirement age (FRA). But if, after your death, your wife delays claiming her survivor benefit until after her FRA, she gets no credit for that delay. In other words, you help your spouse by claiming benefits later than your FRA, but she wouldn’t help herself by claiming her survivor benefit later than her FRA.
Thank you for your clarification
The calculations to optimize SS taking depend on a few key variables, e.g., rates of return and, most significantly, expected remaining life span. It is also clear that one must be able to afford to delay taking SS until a later date. Without substantial retirement savings, continued employment or pension income, a discussion of delaying SS doesn’t have much value.
Something else to consider is the utility of receiving SS early or at your normal retirement age. I began taking SS at 66, even though we had substantial retirement savings. Having the additional cash flow allowed my wife and I to travel and enjoy our retirement while spending little of our savings. The pandemic ended our travels and I fear that by the time we are once again able to travel, our ability to travel as we once did will have diminished.
I wouldn’t discourage anyone from using a SS optimization tool, but everyone needs to recognize that the results generated are not guarantees. Also, factors such as age related decline, illness, early death or unexpected financial need can ruin the best laid retirement plans.
I just looked at a friends 2021 SS statement. It shows age 67 benefit of $2765 and age 70 benefit of $3486 or $771 a month more. I calculated if he took it at 67 he would collect $99,540 by age 70.
However, if the $99,540 had been invested and earned say 7% it would be worth more than $121,940 (actually much more since I did it on an annual basis) and could generate at least $406 a month (4%) income and you would still have over $120,000 and growing.
Where is the flaw in my thinking?
If you invest the $99,450 it is not guaranteed in any way. There is a real, non-zero chance you could have less in three years. And you are generating 52% of the additional income ($406/$771).
There are no guarantees in life, except death and taxes. Take the money and invest it. I’m making 11.25% after expenses on my money. Why wait?
And also a chance you won’t live the eleven years after 70 to break even. There are a number of variables that make the case in different ways it seems.
What does it matter whether you “break even” or not?
[My view, described below, applies only to couples. For singles, I can’t advise.]
This “break-even” question points to what I see as the dominant flaw in SSI planning.
Thinking of Social Security as pure Insurance, rather than as an Annuity Balance that we potentially own challenges many of us. But if you look at your longest possible lifetime need for the largest amount of monthly income, that view offers the best guide for utilizing this important lifetime-Insurance policy there is.
The soonest that you need to live on SSI, the more-likely you are to suffer if one partner dies.Right?
If this happens, the loss of one-half of monthly benefits will be tough. Best to have that survivor’s benefit be as large as it can be, for as long as the survivor lives.
No other scenario can “guarantee” such a near-certainty.
Here’s the other flaw: ss is inflation indexed. Look at the increase that was received for 2022. There’s nothing out there that can match this combination of guaranteed income plus inflation indexing.
The flaw is that SS is a guaranteed source of income while investment returns are not. You are comparing apples to oranges.
The $100,000 is guaranteed though and the $121,000 is pretty much guaranteed. Don’t you think a 4% return is a good bet?
The 8% annual increase plus COLA is a better bet.
As someone that looked into this very intently I also thought about waiting until age 70. The CFP that was available through my 457 program use Social Security solutions, a social security maximizer,analyze my social security drawing, with my wife’s social security payout to be and our portfolio and pensions in mind. Turns out it would be best for me to claim at age 63 and a half and my wife to claim at age 70.I scratched my head at this, because for all the reading I’ve done, it said wait, wait until your age 70 for maximization of benefit for both of you. Well my wife has a little larger benefit than mine to come when she reaches age 70 which she is 2 years younger than I am. So I took the money and hope that everything works out well. Consider using a social security maximizer. Do you understand not all are created equal in regards to the maximizers.
I am waiting until 70 to draw social security but my health is not the best and I doubt that I am using the optimal strategy, but I don’t care. If I’ve guessed wrong and live quite a while, I feel like I have some longevity insurance. If not, I’ll be leaving money on the table for others to enjoy. I guess if you’re happy with your decision it doesn’t really matter what age you choose to start.
The Social Security System thanks you for waiting. They’ll pay you for a few months instead of years.
Thanks for this article. It actually inspired me to look up something I wasn’t sure of: the added benefit of COLA’s when delaying Social Security. My husband is waiting to take his benefit until he’s 70 (he’ll turn 68 in April). I knew he’d be getting an 8% increase in his benefits for every year between full retirement age (66 for him) and age 70. What I was unsure of was how COLA’s factored into the benefits of those people who chose to delay taking Social Security until age 70. The way this article explains it, it makes a strong case for delaying benefits during periods when inflation is running high:
This is another piece of great advice as people never think of this!
I think that regardless of the current inflation rate, delaying until 70 will increase your husband’s benefit by 32% over what it was at 66. Once he begins taking SS at 70, his inflation-adjusted COLAs will increase the difference between what he would have received if he had claimed at 66 and that difference will grow faster during times of high inflation.
But you get the value if the COLA either way, in pay status or delayed.
Yes but the impact of the COLA is magnified by the size of the benefit.
An additional resource is “Social Security for Dummies” (along with “Medicare for Dummies”). I am single, and my pension has no COLA, so I delayed until 70 to get the largest base for future COLA adjustments. I am totally uninterested in whether I get more or less than I paid in, and I don’t understand why that should be a consideration.
Great article….I’ve done a lot of research and writing about Social Security over the last 20 years and will share a couple of thoughts…..While a breakeven point is important to consider, SS is really insurance against outliving one’s income…and insurance against rising inflation as well..Most breakeven discussions I have had with individuals fail to consider the value of COLAs…Speaking of which, the 5.9% increase (and other increases) applies when one is delaying SS and this will have a big impact down the road due to the magic of compounding interest…When you consider a surviving spouse may inherit that benefit, the value increases immensely. I also believe many of the spouses who manage the family finances fail to consider the value of the survivor benefit in that the widow/widower doesn’t have to “manage the money”…Just get a check each month and have it increase annually via COLAs. My guess would be that few spouses of readers here also read the articles…
In a low interest rate environment, the value of SS increases. In terms of taxes, very few individuals truly understand the tax savings that can occur by delaying SS…This is because Social Security goes into the Combined Income formula at a 50% rate…So, if you “trade” IRA income for SS income after age 70, you get a double benefit of no IRA taxes and potentially lower SS taxes. Bill Reichenstein has built off my earlier work in recent years and has some papers on this….Also, in terms of taxes, most states don’t tax SS. So, one can save, say 5%, 6% or more if they choose higher amounts of SS income by delaying (and getting higher COLAs) because they save on the state income tax..
What about the Required minimum distributions that will be taxed?
If you’re drawing down the IRA prior to delayed SS claiming, there are fewer dollars required to be withdrawn after age 72 and thus you can receive the benefit of not triggering the taxation of SS benefits.
Not sure I follow this. IRA taxes can’t be evaded, someone always pays them. There is no step-up upon death the way there is with other assets so if you don’t pay IRA taxes then your heirs will.
If you draw down your IRA to delay SS then you pay the IRA taxes sooner rather than later. And since taxes are progressive you may pay more in total taxes by withdrawing a total amount X from an IRA during those years waiting to start SS than you would have by taking less than X from your IRA and making up the difference by collecting SS (which is taxed at a lower rate under somewhat complicated rules)
Yes, you pay taxes on the IRA earlier, but you avoid having the IRA grow larger which you will owe taxes on and – for many – the IRA dollars withdrawn force the taxation of Social Security benefits. Yes, it’s possible the IRA taxes are higher for withdrawals made prior to delayed SS claiming when you look at those IRA withdrawals alone, but one should look at the overall lifetime income taxes.
Page 10 on this link if you want to do a deeper dive.
Innovative Strategies To Help Maximize Social Security Benefits | Prudential Financial
Exactly, my wife is 16 years younger than me and I retired in 2016, at 66 (filed and suspended) and waited until 70 to take SS payments. We could afford to wait, since my wife was/is still working and I did not need to SS check. This will allow her to get my benefit at my death when she retires, which will be more than her FRA amount. She works part-time because she can at her convenience and does not have to work full time to pay the bills. LOL!!!
This is so interesting. I’d been thinking I’d file for my benefit at FRA (67) with my husband waiting until 70. But I just did that Mike Piper calculator, and it says I should file at age 65.3.
Here’s one question that arose for me reading this. Let’s say I follow the above advice and file at either 65.3 or 67. If my husband dies between then and age 70, I wouldn’t get that maximum benefit as his survivor and I’ve already started my benefit, so I can’t get the age-70 maximum number either.
At this point, our benefits would be identical. Would it make more sense for both of us to wait until we’re 70, so that whoever survives the other ends up with the maximum benefit? We will not need our SS benefits to live on (we both have good pensions and enough savings), but it would still be nice to be smart about this.
Everyone is excited for I-Bonds and their high yield based on CPI but Social Security recently raised benefits 5.9% based on increased cost of living. Maximizing these benefits by deferring gets the added benefit of receiving a larger paycheck if inflation heats up.
Great column. Quick question. I will turn 61 in July. My wife just turned 59. Her social security benefits will be far less than 1/2 of mine, which should be the maximum. In order for her to receive 1/2 of mine, I know I have to wait to claim until I am 67. But does she? In other words, Do we need to wait until I am 681/2 or so, when she will turn, 67, or will she receive 1/2 if I elect to take mine at 67, when she will only be 65 1/2. Thank you for any help you or anyone else can provide.
I believe she has to wait til her full social security age to get the 50 percent.. but I could be wrong..
Thanks. I’ve read what seems to be a million articles on the topic and can’t seem to find a definitive answer.
For your wife to receive the full spousal benefit (i.e. half of your benefit as of your full Social Security retirement age), you have to start your benefit and she needs to delay claiming her spousal benefit until her full Social Security retirement age.
We are currently in the thick of this exact situation. SSA is basing my wife’s spousal amount on my reduced benefit at age 62 ( I’ve applied to start in March, 2022) to calculate the 50% figure. Here, and in many other related articles, working with CPA’s, and within the SSA Code itself, her added spousal amount is supposed to be based on my PIA (= my FRA amount) which is substantially higher. Her amount will of course be reduced because she is applying for the spousal benefit at age 62 – by approx 30%. She will continue to receive her SSID amount same as today without change, except in name, when she reaches her FRA. SSA is telling us that she would only get an added $108 if she applies now. Every other source indicates an added $435/mo. So yes, small wonder people get frustrated in trying to figure their plan when you can’t get consistent numbers. Of course, SSA owns the checkbook here so……. Should be another interesting call with them today. If anyone has any insight on how to break through this issue of benefit amount differences, it would sure be appreciated.
Interesting article.. Im 65 and waiting on SSI. I have a pension and my wife has a pension and is collecting her SSI. (I do take 4% from 401k yearly) My reasoning by waiting is to of course collect more, to protect my wife should I pass first and also use this as an inflation hedge. I will also move some 401k money over to Roth as years go by to limit my RMD.
This topic of taking Social Security benefits has been beat to death with millions of words written about it. The world will not end no matter which decision is made. If a person has only this source of income they will take it ASAP. People with savings and a pension can do what they want. I equate Social Security with cashing in bottles for the deposit.
Some people throw the bottles away into the recycle bin as it is a pain in the ass to haul them to the store. Other folks carefully wash and dry them and return them for 5 or 10 cents. Still other folks will retrieve bottles other people have thrown to the side of the road as the nickels and dimes are very important to them. There is no right or wrong answer, not to bottles nor to Social Security. Please let this topic have a one or two year hiatus. Find something more original to discuss. I thank you all in advance, and God bless.
I’d say that 36 comments (and counting) is a pretty good indication of the interest in this topic.
Thanks for taking the time to comment. I agree that there has been ample writing about SS claiming. I think that is true of many of the topics on HD, especially the “nuts and bolts” type of articles on topics that impact most retirees. I’ve worried about that as I’ve thought about articles. After thinking about it here’s what I’ve come to believe.
1) There are always new retirees and readers who have not read previous works. The topic may be new to them.
2) As the comments show, there are lots of ways to view an important topic. I know I benefit from considering others POVs or decisions.
3) Many of the topics discussed are complex enough, and important enough, that they deserve regular reminding.
4) Many of HD readers are financially secure enough that the SS decision is not critical. Though my years of volunteer work with AARP’s TaxAide I know there are many seniors who depend critically on SS. I also try to keep them in mind as I write.
Thanks William. I have read a lot of Kotlikoff and have used his MaxiFi FP software for a number of years. It includes his SS maximization software.
One issue is not discussed – what if your retirement income is too high? If you’re not careful, you may end up paying IRMAA and NIIT. Taking SS early is one way to lower your income in retirement, while at the same time allowing your NW to grow. This is particularly true if you are a net saver in retirement – collecting SS will allow you to save more and increase your NW. That’s your goal: lower income, and higher net assets.
This topic always fascinates me. For most people it’s really simple though. They start the benefit when they need the money.
For those who voluntarily retire early and start at 62 and need the money, the retirement decision itself may be questionable.
Conventional wisdom says wait until age 70 if you can, higher benefit and all that by why? In reality you are just taking a lower reduction for early collecting, but you are also forgoing years of collecting. Why worry about breaking even?
Why worry about total benefits collected, that must be based on assumptions in any case and after all, why does it matter anyway? You are either here or you are not. What matters is cash in hand for the years you need it and or can enjoy it.
The real breaking even is what you collect relative to the taxes paid. Most people will break even within eight years of collecting. I’ve been collecting since age 67, a little over 11 years. Long ago my total benefits exceeded the combined taxes me and my employer paid and that’s not counting my wife’s benefits based on my earnings.
I started collecting while I was still working part time and collecting my pension. I easily could have delayed, but for several years the SS benefit was invested. I feel like I had my cake and ate it too.
Was it the best financial planning? I don’t know, but it made me feel good.
I’ve gotten my moneys worth from SS – perhaps too much so which is one of the reasons the system needs financial help of its own. 🤑
Excellent article. Thank you. I’m a 70 year old with a lifetime of earning at the SS max. I didn’t need the money so I waited until now to claim. My wife is a dentist who took it early. Her fear: we would be means tested or benefits taxed so severely that all the calculators or online advice articles would be proven meaningless. We no longer trust the government to keep its promises. And no, we are not Afghans.
I appreciate the post and the nuance of contributions vs overall returns, but have to wonder if the big picture is being missed and a penny is being saved while walking past a quarter. Like in the example, I don’t “need” my SS, so when I take it has no impact on my quality of life. My concerns surround the increased income and its impact on my Medicare costs and IRMAA, the Net investment income tax (NIIT), and the likes of these hidden stealth taxes.
My calculations reflect that if I claimed at 62, I would have just a small amount of net gain after all the taxes were levied. By putting off until my FRA or 70, that gives me additional time for Roth conversions which results in me actually keeping more of my SS and have lower IRMAA costs.
Is the decision only about maximizing one’s financial return vs contributions (the “optimal scenario”)? If that’s your thing, fine, but strikes me as attempted “market timing” (because one never knows the end date) and in my book misses the point.
I’m waiting for one of these oft-repeated HumbleDollar articles on this topic to even casually mention the very real – or at least, not ignorable – risk of diminished SS benefit payouts as forecast by annual Trustees’ Reports.
I can assure you that will never, ever happen.
The risk of such is obviously not zero. Maybe if I got $1 every time some one told me that the risk was indeed zero, it would offset my loss of benefits when it happens in whatever form it may take. It might not be simple reduction of benefits across the board, but perhaps increased means testing or taxation.
That is quantifiable, David. You can estimate your perceived risk of diminishment, the size of the diminished payout, and the timing of this change. Practically, though, for those of us in the 62-70 age range these factors are likely a much smaller impact than our personal risk scenarios. Still, I agree you are right to think about the risks on both sides of the contract!
For the author, risks all figured in at less than 10%. This is an excellent result, as it means it’s fine to do what you feel like. Perhaps that’s what we should be telling more seniors about claiming strategies!
For me, by the time I estimate and multiply the factors affecting diminished SS payout risks, they also come in at less than 10%, and that’s a risk I can also live with.