This blog accompanies Episode 11 of The Retirement Oasis Podcast. To listen to the podcast, you can visit your favorite podcast platform (Apple, Stitcher, Podbean, etc.) or go here:
In the prior episode, we reviewed the fundamentals of Social Security. We discussed the factors that went into calculating the SS benefit, what one might be able to expect from SS, whether we can rely on the funding of SS for retirement, how to read your Social Statement, and some fundamental rules on SS retirement benefits. I encourage you to go back and listen to Episode 9 if you feel like you need to understand the fundamentals a bit more, and this episode builds on that.
A Brief Overview of Social Security Fundamentals
I won’t review all of the fundamentals today, but I did want to highlight a few rules of Social Security as it will impact your decision on when to take Social Security.
Claiming age impact. As we stated before, you can generally elect to take Social Security at your Full Retirement Age (FRA) -- which is likely between ages 66 and 67 -- at the base amount called the Primary Insurance Amount (PIA). Or, you can take a reduced amount earlier – as early as age 62, in general. Or, you can take an enhanced benefit after FRA up until age 70.
Spousal benefits and survivor benefits. The other main rule to consider is how spousal and survivor benefits are impacted. Each spouse can take the higher of his or her own benefit or 50% of the other spouse’s benefit (or, really the other spouse’s PIA with certain adjustments). And, in survivorship, the surviving spouse can take the higher of his or her benefit or 100% of the deceased spouse’s benefit.
All of these rules could impact your decision on when to elect to begin receiving Social Security, or your claiming age.
Social Security will be around. We also expressed our view that we feel like the Social Security benefits are certainly going to be there for retirement, but some changes will likely take place to shore up the SS system, but the younger generation are the ones that will likely have their benefits reduced slightly, one way or the other.
With that backdrop, let’s turn to the question of the day – when is the optimal time to claim Social Security.
When Should I Begin Taking Social Security?
My Cliff Notes answer to the question of when to claim Social Security is this: while I generally favor taking Social Security later rather than earlier, this decision is not as clear cut and should be unique to each individual based on their circumstances. We generally perform either a break-even analysis or a cumulative benefits analysis to determine the optimal claiming age, and this involves a few complications. Furthermore, and adding to the complexity, the analysis is slightly different for a single individual versus a married couple.
Other Considerations in Deciding When to Claim Social Security Retirement Benefits
Before we look at the break-even analysis, let’s acknowledge that there are factors that may impact your decision on when to take other than the traditional break-even analysis or cumulative benefits analysis.
If you need it to live on Social Security at retirement, you might take it early. First, some SS recipients might need to take their SS benefits early because those are their only resources. And, that’s fine. Certainly, if you retire and don’t have assets or other income to meet your living expenses in retirement, you will clearly want to take it in that case.
If you plan to continue to work well into your 60s, you might want to take SS later. You might want to take SS later regardless of what the numbers say if you are continuing to work past age 62. If you are working prior to your full retirement age and are taking Social Security benefits, your SS benefits are reduced if you make over the threshold amount. In some sense, this is a penalty, but in reality these reduced benefits are not lost forever – SSA will recalculate your benefits when you reach FRA and increase your benefit to account for the reduction in payments.
While the SSA will increase the benefits in this case, you will lose out somewhat on the opportunity cost of investing that money without a corresponding increase in the benefits. Moreover, we have heard that it is quite the hassle dealing with the SSA under this situation so we generally do not recommend taking Social Security when your earnings exceed the threshold.
You might want to claim SS later in order to maximize tax minimization strategies.
Another factor that impacts the decision of when to take other than break-even analysis is to implement certain strategies that could potentially minimize your income tax liabilities.
Roth conversions. For example, in some cases implementing Roth IRA conversions may be beneficial for the retiree and by minimizing one’s taxable income could result in a greater amount of Roth conversions, leading to lower overall income taxes over the long run. If Social Security were obtained earlier in this tax planning window, that would increase taxable income which could reduce the amount of Roth IRA conversions.
Premium Tax Credits for Health Insurance. Another strategy may also relate to the goal of minimizing income and that is trying to maximize the Premium Tax Credit. This relates to effectively getting generous health insurance subsidies for those with lower incomes. By not claiming Social Security in those years in which you are trying to obtain those subsidies, your income will be lower which means that you may qualify for more subsidies. In certain situations, this can result in tens of thousands of dollars of savings in the form of tax credits.
Capital gains taxes. You may also be able to minimize capital gains taxes in the early years of retirements if you elected not to claim your Social Security income at a time in which you were trying to sell some appreciated assets. These strategies can be reviewed in more detail on future episodes, but these three strategies alone are often a reason to delay claiming Social Security.
Basic Tradeoffs and Factors involved with the Optimal Claiming Age Decision
Those factors we just touched on may not apply to you so you may be looking to determine what the optimal claiming age is for your situation based on the traditional approaches to analyzing your optimal claiming age. There are a variety of different calculations you can perform to analyze this optimal timing question, and we will review those in a bit. For now, let’s lay the groundwork for the basic tradeoffs of claiming earlier versus claiming later and delve into the factors that go into the analysis.
For now, we will keep the discussion relatively simple by merely focusing on the claiming strategy for that of a single individual. It is important to understand the decision from this standpoint initially, and we can then build on how the decision becomes a bit more complicated for married couples. As we discussed, your SS retirement benefit is based on your earnings history and when you begin taking Social Security. Your overall cumulative benefits will be based on that and two other factors: your life expectancy and assumed rate of return. If we take your earnings history as a given and understand that your life expectancy and rate of return is somewhat uncertain but somewhat predictable, we can hone in on the question at hand – when to claim Social Security retirement benefits.
Understanding the basic trade-offs of claiming earlier versus later is important. If you claim early, you get a smaller benefit for a longer period of time. The sooner you take Social Security, the more Social Security payments you receive and the earlier you can either spend it or invest it.
The trade-off of claiming earlier is that you will receive a lower amount per payment, but you will receive more payments. At age 62, your benefit is basically reduced by about 5% to 6.7% per year before your Full Retirement Age.
If you wait to begin receiving the benefits, you receive less checks but you can receive more in each payment – sometimes significantly more. If you wait to begin collecting SS at age 70, your benefits are increased by 8% per year from Full Retirement Age.
Thus, for someone age 62 whose FRA is age 67, the benefit is reduced by 30%. If that person waits until age 70, the benefit is 24% more than if they started at age 67. That’s a big increase in the benefits that you receive just by waiting. So, the difference between starting at age 62 and age 70 – the two extremes – is quite large. You can say that the age 70 amount is 77% more than the age 62 amount (or the age 62 amount is 56% of the age 70 amount…the joys of math). That indeed is a huge difference. So, is it a no-brainer to wait to claim SS until age 70 as many suggest?
Not necessarily, because you give up a lot by waiting to claim Social Security at age 70. Again, while you are receiving a higher amount by waiting, you are giving up two things – more paychecks and the potential earnings from those paychecks (i.e., the opportunity cost). So, understanding those factors are key.
A Review of Key Factors in Analyzing the Optimal SS Claiming Age
Now that we have touched on the basic tradeoffs of claiming earlier versus later, let’s explore two key factors in more depth – longevity and rate of return.
Longevity obviously plays a big role in performing the analysis. The longevity impacts the duration of how long you (or your spouse, if applicable) will receive the benefits. This duration, in turn, will impact the cumulative benefits because the benefits are received each month and growth can (theoretically) occur in the benefits during the assumed duration.
Longevity is indeed a wild card – a known unknown as some would say. You obviously don’t know when you will pass away, but you may have an educated estimate based on your genes and lifestyle. There are statistics available to help you in this analysis, including the SSA's Life Expectancy Calculator (which looks at the population as a whole) or a more detailed calculator such as Living to 100 Calculator. Again, if you are truly trying to make an educated decision, it is important to understand the life expectancy table that you are reviewing. Is it the population as a whole regardless of demographics? Or, is it more aligned to your demographics? These tables do not take into account your particular genes, however, so understanding your genes and lifestyle are important so factoring these factors may also be important.
I have heard some use faulty logic when determining when to take Social Security. They say “I may live until 100” so I should take SS later. While it is possible and there is a good argument that SS does provide decent longevity insurance, the fact alone that you “may” live until 100 should not outweigh the other statistics if you were truly taking a mathematical approach to making a decision.
As we will discuss later, understanding longevity from a married couple’s perspective is also important.
Assumed Rate of Return and the Impact on the Optimal Claiming Age
Another key factor in the analysis is the assumed rate of return on your investments. In other words, as you collect Social Security benefits, what kind of returns will those accumulated savings produce. I would argue that many of the analysis tools assume too low of a return. Some basic calculators or basic approaches assume a 0% return. I believe that assuming no growth on the received benefits is clearly wrong and will often lead to the wrong claiming decision (or, at least errantly make it appear the decision is clearly one way over the other). Many tools and analysis that I have seen assume a rate of return that corresponds to a mid-term or long-term government bond – maybe 2% to 3% -- since they say the receipt of Social Security income streams is equivalent to a government bond. They are trying to use the right risk-adjusted return in their eyes.
However, I don’t agree with that approach – either 0% return or a government-bond equivalent return in all circumstances. My view is that the correct rate of return to use is really based on one’s situation. How would the SS claimant effectively allocate the investments? If it is a mix of stocks and bonds in a way that perhaps mirrors their overall portfolio in retirement, a return of 4% to 6% may be realistic. If it was an all- stock portfolio, the return assumption may be higher – perhaps between 6% and 9%.
All else equal, the higher the rate of return you assume, the younger the optimal claiming age is. If you assume a lower return, then that tends to suggest taking SS at a later age.
And, depending on your type of analysis, the rate of return you assume should take into account the fact that the Social Security payments annually increase with inflation. So, you can’t assume a rate of return on your investments and assume no growth on the SS payments.
I also want to address a common misperception about Social Security benefits and the opportunity cost.. Some say that those who claim Social Security earlier spend that money so earnings should not be factored into the analysis. That’s the wrong way to look at it. To truly compare apples to apples you need to assume those who receive their Social Security earlier can earn some kind of return on those Social Security benefits. Even if the early Social Security recipient did indeed spend their benefit, that allowed them to not tap into their other investments which should generally grow based on how it is invested.
Of course, there may be some people that may not be disciplined with their cash flow or assets and would spend their SS frugally in early years just because they had these benefits. For those people, perhaps it is indeed better to wait to take SS until later – waiting to claim benefits later could be a good forced savings strategy for those types of folks. However, our listeners are probably not in that camp. If you are listening to a retirement podcast, you are likely a bit disciplined and looking to make the right financial decisions.
Actuarially Equivalent Approach in Creating the SS Benefit Structure
Before we delve into the analysis for making the optimal claiming decision, let’s take a step back and discuss the concept of actuarially equivalence. In coming up with the benefit payments and the adjustments for the benefits at various ages, Congress and the Social Security Administration attempted to create a payout structure that was actuarially equivalent. This means that regardless of when the various recipients begin receiving the benefit, the present value of all of the benefits is the same, assuming an average life expectancy for the population at large – male and female, all races, and all education levels – and assuming a certain rate of return.
There are two caveats about this actuarial equivalence concept. First, many researchers believe that these actuarial calculations are no longer valid. The last time the claiming age adjustments occurred was in 1983. Since then, the interest rate environment decreased significantly and progress in longevity increased – especially among high earners. Thus, many suggest that current payouts are indeed not actuarially equivalent and now favor taking the benefits later, especially for high earners in light of the high earners’ increased longevity, on average.
Second, your situation may differ from the average. Your longevity and the rate of return assumption that the calculations assume may not be the right assumptions for your situation. Just because the payouts were meant to be actuarially equivalent for the population as a whole does not mean your overall benefits will be the same regardless of when you claim. However, it is nevertheless important to understand that the benefit formulation was an attempt to get the payouts actuarially equivalent. If the actuarial assumptions were perfect and if you have a life expectancy of the average 62-year-old, then the timing of Social Security may not make a huge difference in some cases. But, if you have a much longer life expectancy than the average person, then perhaps that would lead towards waiting to claim Social Security until a later age.
So, understanding where you fit in relation to the averages and understanding that the calculation of the benefits may be somewhat flawed suggests that analyzing your individual situation may be worthwhile.
Alternative Approaches for Analyzing the Optimal Social Security Claiming Age
Now that we have looked some the building blocks of Social Security, the basic tradeoffs of taking earlier versus later, and some key factors in more depth, let’s dive into the different ways to analyze the optimal claiming decision for your particular situation. While you may run across different names for these approaches, or even different meanings of these names, we will review the following types of analyses: a) break-even analysis, b) cumulative benefits to a certain age, and c) rate of return comparison. We will review the break-even analysis and cumulative benefits approach.
Break-even analysis for reviewing the Social Security Claiming Age
The break-even analysis estimates how long it will take for total benefits received by the claiming late to equal, or “break even,” with total benefits begun by the claiming early. For now, we will assume a relatively simple scenario by assuming the individual is single. The analysis, especially a breakeven analysis, becomes more complex for married couples. The breakeven rule for a single individual suggests that if you think you are going to live longer than the break-even age, then you should wait to file for benefits. And, vice versa, if you think you will die before that break-even age.
You can understand this break-even approach by looking at some extreme examples. Of course, if you took your Social Security at age 62 rather than at age 70 and you had a life expectancy of age 75, then obviously taking Social Security earlier would better from a financial standpoint. Although the amount of each paycheck was lower, you received more benefits and accumulated more growth on those benefits than someone starting to receive the benefits at age 70. Sure, your payout per SS check was higher when you waited, but getting those higher benefits for only 5 years was not enough to offset the 8 more years of payout and growth. Now, if you had a life expectancy of age 100, then waiting to take the benefits at age 70 is probably going to be much more beneficial than taking the benefits earlier. Those much larger benefits at age 70 for a generally long period of time made up for fewer payments. Sure, you started at $0 at age 70 while the earlier claiming strategy started with a decent portfolio, but the significantly higher benefits each and every year after age 70 eventually surpassed the earlier claimant’s bucket because it was growing much more slowly. So, as you can see in reviewing these two extreme life expectancy assumptions, the break-even age is somewhere in between a very young age and a very old age.
So, what do the break-even calculations suggest for a single individual? If we assume an average rate of return for a moderate portfolio for a retiree and compare taking earlier (say somewhere between age 62 and FRA) versus taking at age 70, the calculation suggests a break-even age of somewhere between age 86 and age 90. So, this would suggest – if the return assumptions are accurate for your situation – that one should delay taking SS until age 70 compared to taking the benefit at age 62 if they anticipate living to age 86 to 90 or beyond. This does not mean that this is necessarily the break-even age for you, however. And, again, for now, we are just looking at it from a single individual’s perspective and comparing two alternative claiming ages. You could come up with a different break-even age when comparing say FRA and age 70. And, I showed a range of ages because the assumed rate of return greatly impacts the breakeven age. If we assumed an even lower return than I assumed – which is often the case -- then the breakeven age would arguably be even lower than what I derived.
You can also use a similar approach in finding the break-even rate of return. You can hold the longevity fixed, and calculate what rate of return will you need to exceed to make claiming at one age better than the other. We won’t get into this calculation here, but for those who like to analyze things this is an optional approach.
Cumulative Benefit of Payouts In Determining the Optimal Social Security Claiming Age
Another way to analyze the optimal claiming age is to calculate the total cumulative payouts, including the earnings on the payouts, through one’s assumed life expectancy. So, here, we are not calculating a breakeven age but we are now comparing the cumulative benefits through an assumed life expectancy, and comparing two or more different claiming ages.
Just as with the break-even analysis, the results are impacted by the assumed return you can get on your investments. The lower the rate of return you assume, the lower the relative benefits of claiming earlier. And, of course, the higher the rate of return you assume, the greater the relative benefits of claiming earlier.
Of course, while the rate of return plays a major role in the analysis, one’s longevity also impacts the results for this cumulative payout results. The longer your assumed life expectancy, the higher likelihood that claiming later is optimal.
As an example, let’s assume you said you were going to live until age 90 and assumed a moderate rate of return from a mix of stocks and bonds. The hypothetical results (i.e., I am completely making this up because I don’t want to suggest anything for your particular situation) might indicate your cumulative benefits were the following based on different claiming ages: a) Age 62 claiming age: $860,000, b) Age 67 claiming age: $900,000, and c) Age 70 claiming age: $940,000. If these were the results – and they are not for your situation – the cumulative benefits approach would suggest that claiming at age 70 is $80,000 better than claiming at age 62, or about 9% better. You might say that you don’t have a life expectancy of age 90. Perhaps yours is a bit lower than that or a little bit longer. You can run the same analysis and compare the cumulative benefits. Again, the rate of return you use is the wild card with this approach.
In general, I like using the cumulative benefits approach because I like the idea of starting with what my assumed life expectancy might be rather than solving for what my breakeven age would be. This approach also allows you to more quickly come up with the optimal strategy more quickly when comparing different claiming dates (as long as your assumed life expectancy stays constant).
As you can see, the optimal claiming strategy is not clear cut and is dependent on assumed longevity and assumed rate of return, just as with the break-even analysis.
Regardless of the approach, you should come to the same conclusions – it just depends on what variable you are trying to solve. You can play around with any of the variables – whether it is the longevity, rate of return, or claiming age -- and solve for the missing variable.
Analyzing the Optimal Claiming Ages for a Married Couple Is More Complicated
So, we have now reviewed the basic analysis for the optimal claiming age in general and more particularly for a single individual. The decision of when to claim Social Security retirement benefits is more complicated with a married couple. While you can do a break-even calculation for each spouse as we discussed earlier, the calculation is somewhat more complicated due to manner in which spousal benefits and the survivor benefit are calculated.
To understand the complexities of calculating the optimal claiming ages for a married couple, let’s explore the rules around spousal and survivor benefits a bit more. As you may recall, the spousal benefit rules say that a spouse (let’s say the Lower Earning Spouse) can receive the higher of his or her own benefit or 50% of the other spouse’s benefit (let’s say the Higher Earning Spouse). The benefit is adjusted based on when the when the Lower Earning Spouse takes the benefit and when the Higher Earning Spouse takes the benefit. Also, the Lower Earning Spouse can only begin to receive his or her spousal benefit when the Higher Earning Spouse is taking his or her own benefit.
For the survivor benefits, the surviving spouse can receive the higher of his or her own benefit or the deceased spouse’s benefit. The surviving spouse does not get to receive both benefits but merely the higher benefit. Thus, as you may have surmised, this certainly impacts the calculation because the view of longevity is a bit different. For a single individual, we were just worried about that individual’s longevity. For a married couple, we now need to take into account the longevity of the other spouse in performing the calculation.
If both spouses expected to receive the same Social Security amount and had the ages and life expectancies, the analysis and conclusion is generally similar to the calculation for that of a single individual. However, that is usually not the case – one spouse usually is expected to receive a higher amount, has a different age than the other spouse, and has a different life expectancy than his or her mate. Thus, a more detailed canulation is indeed needed to calculate the optimal claiming age for both spouses. I call this the optimal claiming strategy because now it relates to deciding on the combination of claiming ages that is appropriate for both spouses.
So, you need to take into account two time periods: the duration of their joint lives – when both spouses are living -- and the duration of the survivorship period. Often times, the primary key age is the survivor’s life expectancy since this duration will generally drive when to claim the Higher Earner’s benefit. For example, if the Higher Earning Spouse was age 70 and the Lower Earning Spouse was age 65 and they both had a life expectancy of age 90, then the applicable duration for determining the relative benefits of the Higher Earning Spouse taking at age 70 is 25 years – the years remaining for the younger spouse which is the Lower Earning Spouse in this case.
And, the statistics show that one spouse in a marriage has a longer life expectancy than a single individual. On average, there is a greater probability of at least one spouse surviving until age 90 compared to a single individual, and that is a reason why the optimal claiming strategy tends to tilt towards claiming Social Security later for a Higher Earning Spouse when compared to a single individual, all else equal. For example, the Society of Actuaries says there is a 63% chance that one of the spouses at age 65 will survive until age 90 while a single male or female would have a 33% to 44% chance of surviving until age 90. And, as we discussed earlier, those with higher incomes tend to have even better longevity statistics.
Again, you are generally faced with two decisions: when the Higher Earning Spouse begins taking the benefits and when the Lower Earning Spouse begins taking the benefits.
In general, many couples may be better off if the Higher Earning Spouse delays taking Social Security until a later age – perhaps up until age 70 – in order to get the Higher Earning benefit for a longer period of time. Again, the duration of receiving this Higher Earning spouse’s benefit is a key. It’s not the necessarily the lifetime of the Higher Earning Spouse – rather, it is the lifetime of the longer of the two lifetimes. So, the wider the difference in ages among the spouses, the greater the benefit of delaying of the Higher Earning Spouse if the Higher Earning Spouse is older, all else equal. If the Higher Earning Spouse is younger, it may very well still be beneficial to delay until age 70 but the difference in overall benefits may not be as great and the calculation certainly changes. Again, it still comes down to considering the joint life expectancy of the couples.
While we want to determine optimal claiming age for the Higher Earning Spouse, another important decision is the optimal claiming age for the Lower Earning Spouse. As we stated, for spouses that are only eligible for the Spousal benefit, then the Lower Earning Spouse cannot claim benefits until the Higher Earning Spouse begins receiving benefits on his or her own earnings record. However, this does not necessarily mean that you only focus on the claiming decision of the Higher Earning Spouse. Depending on the benefit amounts, the difference in ages, and the life expectancies of each spouse, the decision of when they should each claim would be impacted and thus should be looked at in tandem. For example, one might otherwise conclude it makes sense for the Higher Earning Spouse to take at age 70. However, if the Lower Earning Spouse is the same age and cannot obtain any SS benefits on his or her own earning record, that means the Lower Earning Spouse would have to wait until age 70 without receiving any enhanced benefits. Depending on the numbers (benefit amounts, rates of return, life expectancies), it might make sense for both spouses to claim at FRA.
If the Lower Earning Spouse is eligible on his or her own earnings record, then the optimal claiming age for both could be impacted but it’s a slightly different analysis. All else equal, the closer the spouses are in terms of benefit amounts, the less relevant is the need to make a joint decision on when to claim. In that case, the decision on when to claim becomes focused on two things: a) as it relates to the benefit of the Higher Earning Spouse, the lifetime of the surviving spouse (or, the longest life expectancy), and b) as it relates to the Lower Earning Spouse, the lifetime of the first spouse to die.
So, as you can see, it is quite a bit more complicated when determining the optimal claiming age for a married couple. There are almost endless possibilities of both longevity combinations (e.g., Spouse A passes at age 90, Spouse B passes at age 95; Spouse A passes at age 88, Spouse B passes at age 83, and so on). There are also more claiming age options for a couple than there are for a single individual since you are now looking at the combination of two claiming ages, and this obviously adds to the complexity. The variables of the overall benefits, the difference in benefits between spouses, the longevity of each spouse, the difference in ages, and the rate of return all impact the optimal claiming age for married couples.
At the end of the day, you really just need to run the numbers to determine what is optimal for your situation, knowing that most people won’t be able to nail down the optimal claiming age with exactness because you don’t know your life expectancy or rate of return with precision. What you don’t want to do is to make the same decision as your neighbor because their situation is different.
Where Can You Get Help for Performing the Optimal Claiming Age Calculations?
There are a few ways to turn to analyze your personal optimal claiming age strategy. a) nothing and let the chips fall as they may, b) create an excel spreadsheet on your own, c) find commercial software or online analysis tool, or d) work with an advisor that has access to tools and wisdom about overall planning.
Software options. Some popular commercial software includes https://maximizemysocialsecurity.com/ and Covisum’s Social Security Timing. Maximize My Social Security appears to be currently $40 and is well done overall. You can get more one-on-one help for additional fees. Covisum appears to only be available for advisors. My favorite free tool is at https://opensocialsecurity.com/. There are no doubt others out there. I would stay away from many, however, due to their limited analysis capabilities. Of course, the data input is critical so you will want to understand your actual benefit amounts, input and assumptions around longevity, and rate of return assumptions. Be aware that some of these tools offer suggestions on the assumptions. I don’t necessarily agree with all of their defaults so it is important to understand what defaults you feel comfortable with. (As an aside, our firm uses Covisum as we like the break-even analysis that it provides as well as the cumulative benefits approach.)
Using an advisor-centric approach. The benefits of using your advisor, if you have one, is that they should be able to more fully coordinate all of your moving pieces to select the right claiming strategy for you. If they are tax focused, they could factor in some of those strategies discussed above as well as coordinate the claiming decision with your overall retirement planning and asset allocation. This will obviously be the more expensive route so you need to evaluate the value that you receive (including mistakes avoided) as well as the time saved.
Other unique issues for the optimal claiming decision
In addition to the factors that we highlighted, there are additional complexities that could impact one’s optimal claiming strategy, including the ages of your children, income taxes, widow(er)s, and divorcees.
Ages of Children. If you have minor children at home, your decision on the optimal claiming age may indeed change. The general rule is that a retiree currently getting retirement benefits on his or her own earnings record can also lead to the dependent child under age 18 to receive up to 50% of the claimant’s Primary Insurance Amount. There are family maximums that may limit this benefit and there are certainly other complications, but as you could imagine this might suggest a different optimal claiming age for those that otherwise don’t have children in this category.
Widow(er)s. If you are a widow(er), the analysis and strategy is a bit different as well. We won’t delve into detail on this at this time, but the fact that the widow can take as early as age 60 and the fact that the widower has the option of taking the deceased spouse’s benefit early while at the same time letting his or her own benefit receive delayed credits until age 70 leads to a different analysis. Also, there is a rule that says that if a spouse remarries before age 60, then the widow(er) cannot receive a benefit based on the deceased spouse’s benefit. All of these rules need to be taken into account when deciding the optimal claiming age for the widow(er) – as well as when to remarry, I suppose!
Creative claiming strategies. Many of you may be wondering about various claiming strategies that you have read about – claim and suspend, restricted application, etc. In general, these strategies are not as available today. The restricted application strategy is still available for those that were born before January 2, 1954. Most at this age have already began receiving their Social Security benefits. So, the widower’s strategy discussed above is the more common situation where a creative claiming strategy can be still used.
Using the Social Security Claiming Strategy as an Asset Allocation Tool
Now that we have reviewed the optimal claiming age strategy, let’s pivot and talk about a flexible approach about claiming Social Security. The beautiful thing about claiming Social Security is that you don’t have to decide at age 62 as to when you will take it. Of course, if you decide not to take it at age 62 then you are making a decision not to take it then. You can wait and see if age 63 makes sense for your situation and revisit this for each year -- or even month – up to age 70 to decide when to begin claiming Social Security. That leads to a unique planning strategy, and it could impact one’s mix of stocks and bonds in the early years of retirement. This decision, in turn, can impact the rate of return one may potentially receive on his or her investment portfolio.
Asset allocation and matched bucket overview. We indeed like to remain flexible in recommending the Social Security claiming age for our clients as this could potentially provide some benefits in the asset allocation decision of portfolios. To explain this further, we need to explain a particular method of deriving the mix of stocks and bonds and it is a method we generally use to manage our client’s and our own portfolios. It’s called the Matched Bucket or Liability-Driven approach. There are (wide) variations out there of this investment approach, but I’ll explain ours in general. We look at the investor’s cash flow needs for the next 7 to 10 years and buy bonds that mature to match up to that cash flow withdrawal need. That portion is called the Matched Bucket. The balance of the portfolio can theoretically be invested in stocks for long-term growth, and this is often referred to as the Growth Bucket. Now, if we assume Social Security is being received earlier rather than later, that will generally reduce the amount of assumed withdrawals needed from the portfolio since the investor is assumed to be receiving the cash flow from the Social Security. More of the portfolio can be allocated to stocks. And, in general, we anticipate stocks providing a higher return than bonds over a long period of time. It’s not guaranteed, of course, but it holds more often than not. Thus, by assuming the Social Security spicket will be turned on earlier, we can take a more aggressive approach in allocating to stocks with the goal of receiving higher overall returns.
And, we generally like to have say 7 to 10 years’ worth of safe bonds to cover an investor’s needs. Let’s say a year went by and the individual used up one year’s worth of bonds, we generally sell stock the next year to buy the new 10th year of bonds. And, that generally works quite well if the market is performing at or near average. If the market really performed well, we can indeed sell the stock to buy that next years’ worth of bonds. We can even decide at that point to sell more stocks than initially planned and decide to defer taking the Social Security a bit later. Now, if the market takes an unexpected dive – which markets are obviously prone to do on occasion – we can decide to take Social Security as originally planned and not sell stocks to cover the otherwise assumed SS payments. Of course, once we decide to claim SS, we generally cannot go back and forth in deciding whether to claim SS or not. So, this flexible approach in deciding when to take Social Security ties nicely to the Matched Bucket approach and can potentially lead to favorable investment results, but it is not ideal for everyone and is not a strategy that is guaranteed to work.
Thus, the simple question of when to claim Social Security retirement benefits can involve some complexities. There are many factors to consider, including one’s cash flow needs, income taxes, investments, and longevity, among others. In general, we like to defer taking Social Security to age 70 in many cases for both the tax benefits and some longevity insurance. Finally, claiming Social Security early may be wise if there are no significant tax benefits from waiting, if you can earn good returns on your Social Security proceeds, and you don’t have a relatively long life expectancy. Married couples will really need to do detailed analysis because of the interplay of their optimal claiming age decisions. Finally, there may be situations in which the Social Security Flex Claiming Strategy be used by you or your advisors to potentially lead to more positive results resulting from a slightly more aggressive asset allocation. As with all financial decisions in retirement, the decision of when to take Social Security should be made by looking at your overall situation.
We often like to end our episodes with an action step for our listeners. The action step for you is to find out what your Social Security benefit might be at the various ages. Sign up through the Social Security Administration website if you have not done that yet and begin to review the optimal Social Security claiming age. In relation to that, understand how Social Security fits into your cash flow needs and overall financial planning situation.
 For an excellent scholarly article on this subject that references other studies, see Brian Alleva, Discount Rate Specification and the Social Security Claiming Decision, Social Security Bulletin, Vol. 76 No. 2, 2016.
 For an interesting discussion, see Alicia H. Munnell and Anqi Chen*, “Are Social Security’s Actuarial Adjustments Still Correct?”, Center for Retirement Research, Boston College. November 2019, Number 19-18. They argue that the early payout reduction percentages are too high and that the enhanced credit percentages are now too large. There is also an excellent discussion and graph that illustrates the difference in life expectancy based on income percentiles (i.e., high earners v. low earners).