Tuesday, October 22, 2013

Need Help with Your Social Security Claiming Decision?

In my last post, I'm Not Ready for Social Security, I promised to provide an actual case study that I ran through the MaximizeMySocialSecurity.com (MMSS) website. That post listed several good free and paid websites to help you decide when to claim Social Security benefits. MMSS is the one I chose, in large part because I also use E$Planner.

Joe and Sally (real people, fake names) are approaching their minimum age of 63 to receive (also minimum) Social Security retirement benefits. They are both relatively high earners in their current careers, though Joe earns quite a bit more, so his benefits will be higher.

For various reasons, some wise though most unwise in my opinion, many people choose to claim Social Security retirement benefits at the earliest possible date, even though these benefits would increase about 8% a year for every year they waited.

I asked Joe and Sally to send me earnings histories copied from SocialSecurity.org and I plugged them into MMSS. I then ran the software with the assumption that both would live to age 70.

This is the worst case for claiming late, because if Joe waited until age 70 to claim and died sooner, he’d receive no retirement benefits at all. (Sally would, however, receive larger survivors benefits because Joe had postponed his own retirement benefits[1].)

If both Sally and Joe had claimed their own retirement benefits at age 63 and died at age 70, their lifetime benefits would have totaled $282,712.

(MMSS found 42,209 possible claiming options to consider. Want to work that out by hand?)

Now, let’s look at the other extreme and assume that both live to age 100. MMSS shows that claiming at the earliest possible age would have generated $981,232 in lifetime benefits, but claiming optimally would provide $1,246,962 in benefits, or $265,694 more. It recommends the following claiming strategy:

  • Joe should take retirement benefits in Jan 2023, the year Joe turns 71.
  • Joe should take spousal benefits in Jan 2019, the year Joe turns 67.
  • Sally should file and suspend[ii] in Dec 2018, the year Sally turns 68.
  • Sally should take retirement benefits in Dec 2020, the year Sally turns 70.
Complicated, right?

A million two is a pretty impressive number, but according to Michael Kitces, "the probability of a joint life expectancy of 30 years for a 65-year-old couple (to age 95) is already as low as 18%. A 35-year life expectancy for that same couple (to age 100) has a mere 3.7% likelihood.”

So, what happens if Sally and Joe live to 95 instead of 100? MMSS recommends the same claiming strategy and forecasts lifetime benefits of  $1,101,411. Still a nice number and $205,657 more than they would get from claiming early.

I ran several scenarios for different longevities for Joe, but always assuming Sally would live to 95, which in my experience is not an unusual outcome. MMSS recommends in every scenario that Joe claim spousal benefits based on Sally’s earnings history when he reaches age 67 and delay receiving his own benefits until he reaches age 71. Sally’s recommendation is to always claim her own benefit (not her spousal benefit), but the best age for her to claim those benefits varies depending on how long she expects Joe to live.

The rightmost column shows the additional benefits the two would receive compared to claiming at the earliest opportunity. (Click table to enlarge.)

Now, I would never recommend that you base claiming benefits on how long you guess you will live, unless you have firm medical reasons to expect a less-than-average life span. If you guess wrong, you can be really screwed.

Absent that kind of poor medical prognosis, I would suggest that Sally wait to at least age 68 to claim if she can afford to.

The free AARP site provided similar advice, but not as detailed. That’s because the site uses life expectancy rather than allowing you to choose a planning horizon. It also uses income averages instead of actual lifetime earnings records from Social Security.

There are several points to take away from this analysis:

1.     Social Security benefits claiming can be very complex (42,209 possible choices in this analysis), especially if you are married or divorced or one of you can claim a public pension. You need to consult a professional financial planner or use a reliable web-based tool. There are many possible strategies and the best websites, including SocialSecuritySolutions.com and MaximizeMySocialSecurity.com, will consider them all. Forty bucks seems a small price to pay with a hundred grand at risk. A qualified financial advisor would be a good investment, too.

2.     The specific scenario in my example cannot be generalized. You might receive different advice if you were single, divorced, eligible for a public pension, a different age, or if your earnings during your career were significantly different than these. Don’t trust magazine articles that provide general Social Security advice. No single strategy fits all. That includes "always claim as soon as you can" and "always wait as long as you can." Tailor your strategies to your households’ specifics.

3.    Your benefits claim can have a dramatic effect on lifetime benefits and your benefits may be the most important component of your retirement income if you weren’t able to save enough for retirement.

There are two additional recommendations that I would make.

First and foremost, think of Social Security benefits as longevity insurance to make sure you have income when you are very old, or that your surviving spouse does. If you were the higher earner, your spouse's survivors benefits will depend on when you claim retirement benefits. If you claim early, you not only lower your retirement benefit, you lower benefits for your surviving spouse for the rest of his or her life.

Second, consider your claiming strategy within your overall retirement financing plan. It is difficult to identify the best claiming strategy without understanding when you will need that income the most. If you have a lot of savings or can work part time to cover your spending requirements for the first few years after you retire, claim later to receive greater benefits. Consumption smoothing software like E$Planner, or a financial advisor, can help you integrate Social Security benefits with the rest of your retirement plan.

Claiming Social Security retirement benefits is very complicated and it is extremely important that you get it right. A lot of money is at stake. Unless you're an expert, get help.

Claiming early might ensure that you squeeze every penny out of Social Security should you die early, but that’s like buying home or car insurance that only pays the small claims that you could afford to pay out of pocket. 

A short retirement won't cost much.

It’s the big claims that can destroy your finances, and living to age 90 or older is a very, very big claim.

[1] Your spouse’s survivors benefits equal your retirement benefits, if you have begun receiving them. Limiting your own retirement benefit consequently limits your spouse’s survivors benefit.

[2] “File and Suspend” is a strategy for claiming your retirement benefits and immediately suspending them so you spouse can claim spousal benefits and you can keep the meter running on your own retirement benefit. You can read more here.


  1. I don't think I can agree with your recommendation to "base claiming benefits on how long you guess you will live." I would guess that most people would guess wrong. And yet, using life expectancy as per the AARP site is not ideal either. As you say, social security is longevity insurance in a sense, and as such, considering worst (really, best) cases for longevity is prudent. Perhaps it would be a nice feature (and yet even more complicated) to break it down into probabilities of living to various ages, the best claiming plan if one lives to that age, and the difference between the optimal plan for that age and the optimal plan overall/for the average life expectancy.

    1. I totally agree with you, Steve. As I originally said, recommending that is the last thing I would do. I modified the sentence to clarify.

      Let me be perfectly clear. I recommend that you assume you will live to 95 or 100 when planning your retirement financing, and that includes claiming Social Security benefits, unless your doctor has told you to expect otherwise.

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