Making Smart Social Security Decisions

Lately, one of the hottest topics in financial planning concerns maximizing one’s social security benefits.   In fact, it’s hard to find an industry publication without an article on the subject.  Even the mainstream financial magazines, such as Money Magazine and Kiplinger’s Personal Finance, have made social security claiming strategies one of their favorite subjects.

Most of these articles talk about maximizing social security benefits. In the title of this article, I have used the term smart rather than maximize, because you cannot know in advance if a particular decision will provide the greatest benefits over your lifetime – as you don’t know how long you will live. Even so, a smarter claiming strategy can greatly enhance the likely benefits you would receive over your lifetime and could also generate more than $150,000 for a family above the typical approach.

Social security retirement benefits are based on actuarial assumptions that are designed to provide payments that are essentially equivalent in value - irrespective of which age payments begin. You will never know if you received the most available benefits, though, because it can’t be determined in advance. Moreover, nobody is going to conduct an audit after you are gone. Even so, if you arm yourself with some basic information about the system and your particular options, you can increase the potential benefits.

Although you must make a decision well before the ultimate outcome can be known, there are several ways to skew the odds in your favor even without using one of the more sophisticated strategies. Consider the following.

  • Even though we know that women live longer than men, the actuarial assumptions inherent in the social security calculations are gender neutral.
  • The calculations used by the Social Security Administration have been around for many years, yet updated mortality tables reflect that people are living longer.
  • Mortality tables are based on averages, so one-half live longer than average and one-half live shorter lives. Knowing your own health status and family history could slant a decision in your favor.

When determining when and how to claim social security benefits, there are two primary objectives. One is to accumulate the most total dollars over your lifetime. This is the factor that most people focus on. Another concern for some people should also be to reduce the longevity risk, which is the chance that you will outlive your assets. These objectives are similar, but different in some cases.

The decision is never easy, but it’s not nearly as complicated for a single person as compared to a married couple. For a single person, a reasonable guidepost to maximize total potential benefits is the breakeven age. This is the age, where living longer would make delaying the start of benefits advantageous. The breakeven age varies slightly depending upon specific circumstances, but it is generally very close to age 80. That is, if you think you will live past age 80, you should consider delaying the start of benefits for as long as possible. Conversely, if you can’t imagine living that long, you might want to get the checks coming earlier.

While knowing the breakeven age is helpful, you should also consider the amount of assets that you have, other income sources, tax status, and other aspects of your personal financial situation. Nevertheless, delaying the start of benefits will often be the wise choice for an individual to maximize potential lifetime benefits and to reduce the chance of ever running out of money.

The timing decision for a married couple is more complex and can have a greater financial impact. For one thing, social security provides survivor benefits to a widowed spouse, which means that the best claiming strategy for a married couple will consider two lives rather than just one. For example, the higher wage earner of a couple might want to delay benefits, even if he or she expects to die before the age-80 guideline. This is because the surviving spouse could live many more years and receive the higher survivor payment in place of their own smaller benefit.

In addition, social security provides spousal benefits that can cause total benefits for a couple to exceed the combined amount for two single people. Each has the option of filing based on their work record or taking spousal benefits. In fact, a person could start taking a benefit calculated one way, and later switch to another calculation if it provides a greater amount. This is a "double dip" strategy, because the delay is fully compensated with higher checks later, so the spousal benefit is like free money.

The difference in ages for a married couple can also influence the decision as well as the relative amount of each person’s benefit. As with a single person, other assets, income, and tax situation should also be considered. There are other rules to be aware of to get the most out of social security. For instance, even a divorced person might be eligible for a higher benefit based on the work record of an ex-spouse.

These factors create many combinations to evaluate and make it impossible to generalize with total confidence. However, it would typically be a good strategy for the higher earning spouse to delay as long as possible. The smart decision would be to wait, because the higher amount will be paid until the second person dies. While the higher wage earner is alive, they will obviously receive the greater benefit, but upon death the amount continues to be distributed to the surviving spouse. The start date for the lower earning spouse tends to be less critical and often points to starting early, because this lower benefit amount will only be paid until the first death.

There are a variety of special rules to understand as well. For example, each person has a Full Retirement Age (FRA) based on when they were born, which would be between age 66 and 67 for most people reading this article. Even though a person can file for benefits as early as 62 (and receive a reduced benefit), the FRA has particular significance, because some strategies cannot be employed until the FRA.

As you can see, the social security system is more complicated than it appears on the surface. For years, the standard advice of advisors and the financial media had been to take benefits as soon as possible, which is age 62 for most people. Even SSA representatives at the local offices have pushed the file-at-62 mantra. It’s not a coincidence that the average age of retirement in this country is right around age 62.

The most common advice proffered by advisors and the media today seems to go to the other extreme and says to wait as long as possible before filing for benefits, in order to increase the monthly amount when benefits commence. However, this advice is too cookie-cutter as well. Some retirees may still want to file for social security benefits at 62 or before the FRA. Ultimately, your own personal situation should dictate the strategy to use.

It’s worth noting that some recent analysis shows that the chance of running out of money can be reduced by delaying the start of social security, even if it means drawing from personal investments prematurely. Although counter-intuitive, this stems from the fact that the “delayed credits” received by waiting are like an investment in a high quality immediate payout annuity (not to be confused with variable annuities). The checks foregone in the early years create a higher monthly payment later that lasts for your lifetime. This particular annuity, though, is provided by the U. S. government so it is the most secure you could find, and it is adjusted for inflation, which is rare. The “investment” by delaying benefits produces the equivalent of a high quality inflation adjusted pension. Studies show that it can help preserve (not necessarily maximize) an estate over long periods of time.

The purpose of this article is not to provide a primer on social security benefits. There are plenty of other resources for that. Surprisingly, the Social Security Administration has a very good web site at www.SSA.gov which would be a good starting point. My objective has been to highlight that the decision regarding when to claim social security benefits is extremely important and should not be take lightly. At the very least, don’t rush into a decision. Take the time to make a smart decision. Any time that you take to weigh all of the factors will be compensated by an increased benefit amount. Nobody should file for benefits, until they understand all of the options. Even though you will never know if you selected an optimal strategy, you can take comfort knowing that you made a well-informed and smart decision.