Five Rules for Maximizing Your Social Security Benefits
By Neil Krishnaswamy, CFP®
Earlier this year, I hosted a webinar sharing tips on maximizing Social Security benefits. We explored a variety of situations for individuals, married couples, ex-spouses and widows/widowers. We received some very nice feedback, so if you missed it, a recording of that webinar is available here1. Below are five key takeaways from that presentation.
1. For individuals, your cumulative lifetime Social Security benefits are approximately the same around age 85 no matter when you begin benefits.
Individuals can claim regular Social Security benefits as early as age 62 and as late as age 702. There are trade offs to consider no matter what age you claim. The main factors driving this decision are your life expectancy and expected real (after-inflation) return on your investments. What we find generally is lifetime benefits are approximately the same, regardless of claiming age, if your life expectancy is 85 and a moderate investment profile3 is assumed. This serves as a decent starting point from where we can adapt as needed. For example, more conservative investors with a life expectancy well past 80 are usually better off delaying benefits as late as possible (up to age 70). Conversely, more aggressive investors with life expectancies well short of 90 should probably lean toward taking benefits at an earlier age (closer to 62).
2. For married couples with only one earner, it usually doesn’t pay to delay claiming for the higher earner because it also delays benefits for the non-earning spouse.
There are more complex considerations involved for married couples4, so we devote the remaining rules to them. In most cases, with the exception of Rule #4 later, a spousal benefit cannot be received unless the earning (or higher-earning) spouse has both filed for and is receiving benefits. This makes it less advantageous in many cases for the earning spouse to wait too long before claiming Social Security. That simply makes the non-earning spouse have to wait for benefits as well. In an example I used in the webinar, we found the sweet spot for claiming is somewhere between ages 62 and 66, assuming both spouses were around the same age.
3. For couples, the spouse with the higher Primary Insurance Amount (PIA) should begin his or her benefits primarily based on the life expectancy of the second spouse.
This rule somewhat overrides Rule #2 if there is a large age difference between spouses. If the older spouse is also the higher-earning spouse, it often makes sense to delay benefits as long as possible. Those benefits will continue to be paid out to the younger spouse after death. We can state this rule another way. If at least one spouse is expected to live well beyond the age the higher earner would have turned 85, the couples’ cumulative benefits will be highest if that higher earner delayed claiming his or her own benefits to age 70. In the webinar, I used an example of a couple with an 8-year age gap, but same life expectancy of 85. The older spouse would have been age 93 when all benefits cease. This produces more of an incentive to delay.
4. For couples, your claiming strategy may change materially if either spouse is born before January 1, 1954.
One way to understand this rule is normally when you apply for your Social Security, you will receive a benefit based on your earning’s record or if your spousal benefit is higher, you’ll get a bump up for that. Prior to a law change5 in 2016, you had the option to restrict the scope of your application to just claim your spousal benefit and allow your own benefit to grow with delayed retirement credits. When the law changed, they grandfathered those in who were born before January 1, 1954. So if you are around age 64 or older today, and still haven’t claimed your benefits, you might still be able to take advantage of this. There are strategies available allowing you to “claim now; claim more later.” Your advisor can help you identify and implement such a strategy.
5. For those widowed at a young age, claim your own benefits at earliest eligible age and then switch to a higher survivor benefit later, or vice versa.
Surviving spouses are typically eligible for benefits as early as age 60 (or even age 50 if disabled). There are a number of factors impacting the benefit amount received6. We used a widow as an example in the webinar. If she earned less than her deceased spouse, she would want to consider filing for her own benefits at the earliest eligible age of 62 and then switch to her survivor benefits at a later age (often around age 66). If she earned more than her deceased spouse, then she is often better off claiming her survivor benefits at age 60 and then switching to her own benefits at age 70. Either of the scenarios results in a substantial difference in lifetime benefits compared to most default claiming strategies. Unlike Rule #4 for living couples, widows and widowers can restrict the scope of their Social Security applications regardless of their date of birth. This gives them flexibility, but also more decision points to consider!
Social Security is complex and often difficult to navigate. It’s important to remember the age you retire is not necessarily the age you claim your Social Security benefits. There are also a number of ways you can and should integrate your Social Security decision with the rest of your retirement income plan. We recommend working closely with your advisor to determine your own optimal claiming strategy.
3 Expected real returns for conservative, moderate and aggressive investors is assumed to be 1%, 3% and
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