For most middle-income couples, Social Security represents a substantial portion of their retirement income—often upwards of $500,000 in lifetime benefits. Doesn’t it make sense to maximize that asset if you can?
Social Security is the only retirement asset that:
- Is adjusted annually for inflation
- Is tax-advantaged—at worst, it’s only 85% taxable as ordinary income
- Will continue to pay as long as you live
- Is backed by a government promise
A 62-year-old couple with one above-average earner (Full Retirement Age Benefit of $1,800) and a lesser earning spouse (Full Retirement Age Benefit of $1,000), who both live to average life expectancy could lose over $60,000 in family benefits by making the worst possible decision for when to take Social Security.
- If they both elect at age 62, they could be losing over $50,000
- If they both elect at age 66, this couple could still be leaving $30,000 on the table
- Simply delaying benefits isn’t the answer either. If they both delay to 70, they could be losing over $40,000.
Example used as illustration only, actual results will vary.
Taking Social Security Early or Late?
Most people are eligible to elect Social Security at any time between age 62 and 70. However, many people simply elect Social Security at whatever age they decide to retire, not the age when it will give them the maximum lifetime benefit.
How much you receive from Social Security depends on three primary factors:
- Your earnings record
- When you elect
- How long you expect to live Since you can’t go back and change your earnings record, and you have minimal control over how long you live, calculating an expected lifetime benefit largely hinges on when you elect.
In theory, if you elect early, you will get a smaller benefit for a longer period of time. If you elect later, you will get a larger benefit for a shorter period of time. For single people, the decision of whether to elect early or later is usually as simple as answering the question: do you think you’ll live long enough to make waiting worth it? For example, if you decide to elect at 66, how long will it take for the larger payments to make up for the payments you missed from 62-65.
Single people can use a simple “break-even” calculator to determine how long they would have to live to make waiting worthwhile.
For married couples, however, the decision is much more complex. Why? Because Social Security offers three distinct benefits for married people that these simple calculators ignore:
- Retired Worker Benefit: Based on your own earnings record
- Spousal Benefit: Provides your spouse with a benefit once you claim your own benefit
- Survivor Benefit: Provides your spouse with a benefit after your death
Virtually all of the simple break-even calculators in use today ignore the Spousal and Survivor benefits. More complex planning software includes spousal and survivor benefits but only for one combination of election ages. In short, neither tool offers a thorough analysis. To get an idea of your estimated social security icome visit the USA.GOV website here.
Unusual Strategies for Social Security Timing.
If you file prior to full retirement age, you are deemed to have filed for all benefits for which you are eligible. At full retirement age and beyond, you have several options to elect a limited benefit for a period of time, then switch to a larger benefit at some point in the future. We refer to these planning options as “Switch Strategies®.” There are two basic techniques that enable switch strategies: the “restricted application” and the “file and suspend.” When you go to the Social Security office, the individual you meet with may have been trained to help you identify the highest benefit you can get today, not necessarily over your lifetime, and likely not over the joint lives of you and your spouse. As a result, you may not hear about these techniques during a typical visit.
Once you reach Normal Retirement Age, you have the option to restrict your application to exclude certain benefits. If a benefit is excluded, it will continue to build delayed retirement credits. As an example, a higher-earning spouse, who may want to wait until age 70 to collect his own benefit may be able to file at 66 for only the benefit available under his spouse’s work record, while still allowing his own benefit to build delayed retirement credits. At age 70, he would switch to his own benefit. Alternatively, a lower-earning spouse could restrict his or her application to only spousal benefits while continuing to claim delayed credits on his or her own earnings record.
There are many possible combinations.
It is important to note that Social Security benefits are completely gender-neutral. In other words, any technique that is available to the “primary earner” is also available to the “secondary earner.” Certain combinations of the two techniques are also allowed.