My Time to Claim

Howard Rohleder

I’VE FINALLY DECIDED when to claim my Social Security benefit. Along the way, I realized that calculating the ideal start date is easy—provided you can predict your retirement income needs (doable), your investment returns (hard), the inflation rate (hard), your future tax rate (hard), your date of death (hard) and what Congress will do in the future (impossible).

This particular financial journey began when I was preparing a recent blog post on the knotty issue of when to file. I downloaded my Social Security statement, which shows my benefit amount at various ages, and then used the statement to build an Excel spreadsheet. I expected the calculation would be relatively straightforward because my wife, who is two years older, doesn’t qualify for Social Security on her own.

I started with the conventional wisdom that—because my wife and I don’t need the money for daily living expenses—I should delay Social Security until age 70. That way, I knew I’d get the largest possible benefit. But in our case, there was a complication.

My wife can only begin taking her benefit when I begin mine. While my benefit increases if I delay beyond my full Social Security retirement age (FRA) of 66 years and six months, her spousal benefit is fixed at 50% of my FRA benefit. My waiting until 70 would mean forgoing years of payments that my wife is entitled to—because she wouldn’t receive her spousal benefit until age 72.

In fact, I soon realized that our situation was more complex than I was able to model in Excel. Instead, I turned to the free calculator from financial blogger Mike Piper. It calculated my ideal Social Security claiming age as 69 and seven months—not far from my starting assumption of 70. “Ideal” is defined as the starting date that yields the highest present value over a lifetime, given the model’s assumptions. Logic—and Social Security’s rules—dictated that my wife should start her spousal benefit at the same time I file. The calculator verified this.

But I wasn’t done. The calculator incorporates several important assumptions. First, when will my wife and I die? If we both went to an early grave, starting benefits sooner would be much smarter. The calculator has a default longevity table, but also has optional tables you can choose from and even allows you to input your own estimate. This manual input is valuable to test what happens if the longevity table says you will live to 85, but there’s a bus with your name on it arriving at 75. If you wait until 70 to begin benefits and die sooner than the model suggests, you will have left money on the table—though, in our case, not all would be lost: My wife would receive my higher benefit as a survivor benefit.

The calculator uses a discount rate to calculate the present value of your expected benefits. It defaults to the current Treasury Inflation-Protected Securities yield, but you can override that. The calculator even allows you to input an assumption about future cuts in the Social Security program.

One downside: The calculator doesn’t know the details of our financial or tax situation. Clearly, if I needed the money to make ends meet before age 70, that would override any recommendation to delay filing. What if I make bad investment decisions or inflation erodes our nest egg’s value? These possibilities aren’t built into the model, either.

More difficult is projecting our future tax situation. When I reach 72, I’ll begin taking required minimum distributions from my traditional IRAs, which will boost our taxable income. This has implications for our Social Security payments: If I wait until 70, my larger Social Security benefits will potentially be taxed at a higher rate than if I started smaller payments years earlier.

Some retirees may also be concerned about triggering IRMAA—the income-related monthly adjustment amount that increases Medicare Part B and Part D premiums for high-income individuals. Just $1 over various IRMAA thresholds can trigger substantial premium increases. What if a higher Social Security payment at age 70 adds that extra $1 to our taxable income?

As with the Social Security website, the amounts reported by the calculator are in current dollars, with no assumption about future inflation. Since Social Security payments are indexed for inflation, high inflation might make delaying benefits more appealing, especially if that high inflation hurts our investment returns.

I give credit to Piper for developing an excellent calculator. But like all calculators, it implies a degree of precision—precision that hinges on assumptions that may not hold up.

That said, the calculator has a very useful feature: It produces a color chart showing all possible Social Security start dates and compares the present value of each relative to the ideal claiming date. For instance, the section of the chart shaded dark green shows dates that are within 1% of your ideal start date’s present value.

My calculated ideal date is five months shy of my 70th birthday, but I could start two years and three months earlier and still have an expected present value that’s less than 1% below the ideal. I hadn’t realized there was such a wide range of dates that were close to the ideal. Even starting benefits at my full Social Security retirement age only dropped the present value to 98.2% of the ideal starting date.

The upshot: After all my research, I realized that there’s no single ideal date to begin Social Security. As Piper’s calculator shows, there’s a range of essentially equal ideal dates that you can choose from based on your personal situation and preferences. Indeed, because of the unknowns that lie ahead, any date within that range could wind up being more beneficial than the single calculated ideal start date.

In the end, I decided to deviate from that ideal start date. I’m thinking my IRA required minimum distributions, coupled with Social Security, could deliver a tax hit that subtract from the larger benefits I’d receive by waiting until almost age 70. My inclination is to start at the earliest age that achieves 99% of the ideal. In our case, my wife and I would file just after my 67th birthday. Your mileage may vary.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured—along with five others—on the cover of Kiplinger’s Personal Finance for an article titled “Secrets of My Investment Success.” Check out his previous articles.

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