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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?

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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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Bob Giddings
Bob Giddings
8 months ago

I may need to buy a more expensive SS calculator, but I have two concerns that seem to be overlooked in these models. They all seem to be “breakeven” calculations. Problem 1 They don’t seem to take into account “estate value” which seems to me to be the best determinate the best withdrawal date. Any “death date” before the breakeven date automatically means a lower total estate – you have NO estate value for SS, but the IRA belongs to your heirs. Problem 2 – approx $35Kof SS is tax exempt. Where I live/my budget, $60K is a reasonable income to live on. That means I can withdraw $25K from my IRAs without any taxes, whereas any delay after 62, causes that extra $35K of IRA withdrawal to be taxable, for about a $5K hit on Federal and State taxes. In addition, that $35K continues to grow in the IRA. When I plugged these into a simple “estate value” calculation, early withdrawal won every time. Anyone know of a SS calculator that takes these into account?

ncbill
ncbill
8 months ago

Yep, since I’m the one taking the spousal benefit we’ll (same age) both be starting benefits at FRA, age 67.

Eric Gold
Eric Gold
8 months ago

Very nice calculator. I’ll use it to hedge my bet, and choose ages to take SS that come closest to 99% of ‘ideal’ for the aggregate of scenarios I think my wife and I are most likely to face.

PAUL51
PAUL51
8 months ago

It only comes down to basically taking SS early or waiting till age 70. I will take it at 70 as the higher earner and have not decided yet on my wife’s, although later is probably the right choice. This may result by a SS calculator that we will get less SS.

This is not the red herring for me. It is RMDs from the 401K and now an IRA. After working on my own spreadsheet for years now on the overall retirement flow I could only come to two conclusions: I will pay more in taxes in retirement than when I was working, and the best I can do is average the percentage I estimate I will pay each year. There are some big hitters waiting out there. One is that when one spouse dies, the other will be single. Then their taxes go way up because of that.

My effort is to move as much money as I can within my average percentage each year into a Roth before taking SS. Also, to take advantage of the Trump tax cuts because this will go back to much higher taxes when it sunsets the end of 2025. Then continue to move money to a Roth afterwards to zero out the IRA before my estimated mortality and my wife is single.

Last edited 8 months ago by PAUL51
Bob Wilmes
Bob Wilmes
8 months ago

I highly recommend the MaximizeMySocialSecurity software developed by Boston College professor Laurence Kotlikoff. For a charge of $40, you can enter your information and it will give you a very detailed analysis of you and your wife’s claiming strategy. It is kept up to date with current laws and tax regulations. I signed up after I read his excellent book on Social Security.

https://maximizemysocialsecurity.com/

https://www.amazon.com/Get-Whats-Yours-Revised-Security/dp/1501144766/

Larry Sayler
Larry Sayler
8 months ago

This is a very thorough, and complicated, analysis. I like to keep things simple.

If a person is going to die young, they ought to start SS early. After all, if a person is going to die at age 64 or 65, it would be much better to start SS at 62 than plan on waiting until 70.

On the other hand, if a person is going to live a long time, it is better to wait until age 70. My grandmother passed away just before turning 112. If a person is going to live past 100, the 8 years or not drawing SS (age 62 to 70) are more than repaid by getting the age 70 higher amount for 30+ years.

I don’t know if I will die early or late. Thus, I compromised and started SS at age 66, which happened to be my full retirement age. This was not a totally subjective decision. Yes, I did do some calculations.

Howard Rohleder
Howard Rohleder
8 months ago

In response to the comments posted to date, I don’t believe I said anything about “breaking even” on my years of FICA withholdings. The concept of breaking even is a comparison of starting SS at the earliest eligible FRA vs starting SS later at a higher monthly amount. By starting later, you forgo monthly payments for a period of time. “Breakeven” occurs if you live long enough for the sum those higher payments to out weigh the sum of the earlier forgone lower payments.
As Mr Quinn suggests and as I believe my article makes clear, there is much more to making this choice than simple math. And, many of the factors are unknowable. I wrote the article to counter the conventional wisdom that anyone not needing the money should automatically wait until age 70, unless they have health conditions suggesting a reduced life expectancy. I had accepted that concept, now I don’t. That was the goal of the article. If I had not done the analysis, I would not have recognized this.
I take issue with the idea that there is no point in planning or analyzing this. Like tax law, SS law sets out various rules. Anyone interested in maximizing their own financial situation should understand the tax rules and the SS rules and apply them. As an example, it is true that the first tier of IRMAA is “only” $68 per month, but the upper tiers are higher. Given the choice of saving $68/mo and paying $68/mo, I will choose to save it. Similarly, if the tax law allows me a legal deduction that saves me $816 ($68 times 12) in taxes, I will make the effort to understand and take that deduction.

R Quinn
R Quinn
8 months ago

I honestly don’t understand the need to analyze when to take SS. What real relevance is present value, breaking even? That’s not the objective. Taking SS should be determined by when the money is needed, not trying to figure out how long you will live.

If you don’t really need the money, take it and invest it at NRA. As far as IRMAA goes, at the first point of effect at $91,000 the difference is $68 a month. Is that a big deal relative to the SS benefit or an income of $91,000?

Aren’t the ideal dates based on any number of assumptions that may or may not be realized? When I have used the SS calculator there was an option for present and future dollars.

MarkT29
MarkT29
8 months ago
Reply to  R Quinn

I honestly don’t understand the need to analyze when to take SS. What real relevance is present value, breaking even?

This is a denial of a bedrock principle of finance, that of comparing present value when comparing investments. Dollars in the future are worth less than dollars today. Present value is the way to determine what they are worth today so that a series of payments and receipts at different points of time can be added up. Done with different investment opportunities it allows choosing which is the most profitable.

J Cp
J Cp
8 months ago

I am in the same circumstances as you except my full retirement age is 67. I added a break even analysis. It was around 88 years of age with retirement at 70. If I live longer than that I am in the money. Less, and money is left on the table.

mytimetotravel
mytimetotravel
8 months ago
Reply to  J Cp

To me “break even” is irrelevant. Your FICA taxes supported people drawing SS at that time, your SS will be funded by future workers. My FICA taxes are a sunk cost, my concern when deciding when to take SS was simply to get the largest base payout to maximize future COLA increases. Of course, being single simplified my decision (age 70), but I think most people are making things too complicated by trying to “break even”.

R Quinn
R Quinn
8 months ago
Reply to  J Cp

I’m not sure any money is really left on the table. I paid $132,740 in Social Security payroll taxes from 1959 to 2010. That means in only 3.8 years collecting my benefit I received all I paid in taxes and if you include the employer taxes, it’s 7.5 years. But it gets better. My wife is collecting SS on my record so when you include her monthly benefit we collected an amount equal to all taxes paid in only 4.5 years. 

Eric Gold
Eric Gold
8 months ago
Reply to  R Quinn

Your analysis needs to consider inflation adjusted (“Real”) dollars

J Roy
J Roy
8 months ago
Reply to  R Quinn

I tend to think of breakeven a different way, not compared to what I put in but rather by what I would receive. For example, if I can collect $30k at age 62 in 20 years at age 82 I will have received $600k (ignoring COLA). If I wait until age 67 to collect $40k I get to the $600k at the same time. So if I think I will live past 82, it makes sense to wait. Purely a cash received analysis. Of course it’s complicated by COLAs, longevity, spouse, retirement income, etc. I plan on using my break-even analysis as just another data point.

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