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 break-even 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 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 with $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 you’re 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.
This column first appeared on Humble Dollar. It was republished with permission.