This is a milestone year. The girl I married in her 20’s, is now a “senior citizen.” Though she doesn’t look like one. And I’m close on her heels. (Though I am starting to feel like one, at least on certain days!)
With Caroline turning 62 this year, along with other adjustments to becoming “seniors,” it is time to evaluate for real when she should start taking her Social Security. It could start this summer if she wanted.
But we can also afford to continue living off our investments, like we’ve been doing through our 50’s, and delay Social Security for a while. The rules are complex, the math is intimidating, and popular (though not expert) opinion is divided.
So, what should we do?
Social Security Made Simple
For years now, my go-to reference on Social Security has been friend-of-the-blog Mike Piper’s book, Social Security Made Simple. Mike has a knack for boiling complex subjects down to their essentials and explaining them in as few words as possible.
His talents are put to the test explaining the government’s arcane Social Security rules, but he succeeds in great style. After finishing this easy-reading 100-page book, you won’t be an expert on Social Security, but you will most likely understand everything about it that the majority of us need to know.
For starters, the book includes several handy tables showing the reductions or increases in retirement and spousal benefits depending on your claiming age. These demonstrate the essence of why to consider delaying benefits: you get more.
The book also explains spousal benefits, the complicated deemed filing and restricted application rules (which no longer applies for us younger retirees), and the earnings test for taxing Social Security when you are continuing to work.
Then the book delves into the all-important claiming decision. It explains and discusses the important “breakeven point” for unmarried people. Basically, if you expect to live to at least age 80.5, you’re better off waiting until age 70 to claim, instead of doing it earlier. You’ll get more money in the long run that way.
For married couples, the situation is similar, but more complex. The book walks you through the issues for the higher and lower income spouses. Turns out that delaying benefits, to maximize the higher-earning spouse’s amount, becomes even more valuable for couples, since that larger sum lasts for the duration of both their lives.
This is even more true now that the only generally-available commercial alternative to Social Security, inflation-adjusted annuities, are no longer available.
Mike offers an interesting explanation of accounting for investment returns, with a strong argument that you should use (relatively low) CD/bond returns when evaluating the benefits of taking Social Security early. And it turns out that delaying Social Security, spending your fixed income investments sooner instead, is superior to keeping that fixed income untouched. That’s because Social Security beats fixed income on two counts: overall return and protecting against longevity risk.
The book explains how, when setting aside assets for additional spending prior to taking Social Security, it is mentally helpful to separate your portfolio in two: one (conservative) portion for spending slated prior to beginning Social Security, and a second, conventional, portfolio of balanced investments tailored to your risk tolerance over your remaining lifetime.
The book touches on important financial planning topics for maximizing your lifetime wealth: the taxation of Social Security benefits, the issue of high marginal rates, and tax planning opportunities like Roth conversions.
Finally the book concludes with 6 essential rules of thumb for dealing with Social Security. They are worth reading. I won’t steal any more of Mike’s thunder here. Social Security Made Simple is short, easy to read, and dirt cheap compared to the lifetime of Social Security benefits it advises on. Highly recommended.
Open Social Security
Not content just to publish one of the most useful books on Social Security, several years ago, Mike also put his programming talents to work and created a cutting edge Social Security calculator for optimizing your Social Security benefits. It’s as easy to use as one of Mike’s books, and best of all it’s totally free (and open source, if you’re a programmer and want to see or modify the code)!
Assuming you already have a copy of your benefits statement from the Social Security Administration (and if you don’t, getting one should be a high priority), you can analyze your personal claiming strategy using Open Social Security in less than 5 minutes. So what do you have to lose by trying it?
Open Social Security is different from many other Social Security calculators in taking an approach based on probabilities and life expectancy. The About page tells us that us that it “runs the math for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and reports back, telling you which strategy is expected to provide the most total spendable dollars over your lifetime.”
It does this by multiplying the retirement benefit in a year by your probability of being alive in that year (using average life expectancies), to calculate a probability-weighted annual benefit. All of those benefits are then discounted to account for the time value of money, and summed, to arrive at a total “present value” for the claiming strategy being investigated.
For married couples, the calculator adds a few more details: in addition to analyzing retirement benefits, it also includes spousal benefits and survivor benefits.
When it’s done analyzing, the calculator presents a table showing your year-by-year benefit amounts, and offers a Recommended Strategy for maximizing total dollars over your lifetime. In our case, it recommends that Caroline file for her retirement benefit to begin when she is a little over 65, not quite full retirement age. And that I wait to file for my retirement benefit to begin when I’m age 70. Caroline would also file for her spousal benefit to begin when I turn 70.
If desired, you can use Open Social Security to test alternative claiming strategies, experimenting with the claiming dates for your retirement benefit, your spouse’s retirement benefit, or your spouse’s spousal benefit.
Finally, if you want to customize the calculation further, you can incorporate advanced options including disability benefits, pensions, and disabled children. You can also change options for mortality tables (if you don’t believe you have an average life expectancy), the discount rate used, and possible future benefit cuts — if you believe Social Security could be reduced in the future.
Useful as it is, Open Social Security does not do comprehensive financial planning. It computes how you can get the most Social Security over your lifetime, but doesn’t look at your other financial factors. It doesn’t have access to all your income or assets, and it can’t analyze your tax brackets, so it doesn’t have the data needed to recommend strategies such as Roth conversions to smooth out your tax payments over the retirement years. Thus it can’t maximize your total wealth over your lifetime.
For that you need a comprehensive personal financial model, like our affiliated product Pralana Gold.
In addition to collecting information on your other income, expenses, and assets, Pralana includes a section for defining your Social Security benefits. It asks for these inputs:
- The benefit amounts you and your spouse expect to receive at your Full Retirement Ages based solely on your own work records (or alternatively, the amount you’re currently receiving).
- The ages at which you and your spouse expect to start receiving benefits (or alternatively, that the benefits have already started).
- If your benefits have already started, when did they start?
- Who, if anyone, is doing a File & Suspend?
For the most part, the program takes it from there, and fully automates the analysis. Based on these few inputs, Pralana Gold computes your benefits and your spouse’s benefits, including any applicable spousal benefits, with appropriate reductions or increases based on your specified start ages.
The calculator also handles survivor scenarios. For example, consider a married couple where both partners have Social Security benefits but the husband’s are the higher of the two. In the year in which he dies, Pralana Gold models Social Security income to accurately reflect both his and her benefits up to the point of his death and then only her survivor benefits thereafter.
If you want, the calculator can model a decrease in Social Security benefits at some point in the future. It will apply a benefit reduction of the % you specify, starting in the year you specify. It also allows setting inflation specific to your benefits if you wish.
Pralana Gold offers several key benefits:
- It enables easy what-if exercises: by simply changing start ages, you can quickly observe long term impacts on your net worth without having to compute and enter the benefit amounts yourself.
- It computes the optimum ages for you and your spouse to begin taking benefits.
The calculator offers a clever graphical widget to present its optimized results. It’s a two-dimensional grid of small squares. One axis is your age. The other axis is your spouse’s age. Each square is colored one of 3 ways: optimal, suboptimal, or not recommended.
By clicking the Calculate Optimum Social Security Start Ages button on the Optimize page, Pralana Gold will calculate the optimum ages for you and your spouse (if applicable) to begin taking Social Security benefits. The result is reflected as a dark green square in the widget. The calculator also calculates slightly sub-optimum ages, and these ages are reflected as lighter green squares.
The overall best strategy is taking Social Security at the combined ages marked by the optimal square. The sub-optimal squares represent nearly as good solutions. (And you can control how close they are to optimal by setting the Sub-Optimum Selection Threshold.) These latter squares might represent appealing solutions if you have other qualitative factors in mind, such as wanting to reach a certain level of benefits, or having concerns about government viability. And if you and/or your spouse die prior to your life expectancy, one of these other solutions would end up providing more benefits than the optimal solution. But, if you outlive your life expectancy, the opposite will probably be true.
The analysis the calculator performs during this process is more sophisticated than just determining the start ages that result in the largest long term income; it also examines the long term effects of that income on investments, taxes, and survivor scenarios. In our case, Pralana recommends that we both wait until age 70 to file for Social Security benefits, though Caroline can take hers up to three years earlier, while remaining within a 97% sub-optimum threshold.
The key takeaway to remember with Pralana Gold is that, because it is a complete personal financial model, the analysis takes into consideration not only the absolute amount of your Social Security income, but also its impact. You are getting the “best” overall solution to maximize your standard of living, taking into consideration all the other factors in your personal retirement situation.
Finally, when you are actually using this feature, understand that the program doesn’t automatically incorporate its optimal solution into your plan. To do that, go to the Income page and revise the Social Security start ages you previously specified.
The Claiming Decision
Back to Caroline’s and my Social Security situation. We share two primary concerns with many other people looking at this decision:
- If we delay our benefits, as the calculators encourage us to do, then we will be leaning more heavily on our portfolio in our early and mid-60s. That’s OK as long as the government makes good on its commitment to us when I turn 70. But what if it doesn’t? What if our fickle politicians change the rules in an attempt to shore up Social Security or other government spending, and we get less than we expected? In that case our portfolio will have been permanently reduced in expectation of receiving more Social Security, and might never recover. Our lifestyle might have to be curtailed and we could enter our 70’s worried about money.
- It’s very tempting to “hedge our bets” by asking the government for some of our money now. Then, if something happens to the Social Security rules down the road, at least we will have gotten some of our money out of the system. This seems to be a common approach to Social Security claiming, even though the calculators tell us the odds are we’ll get less money in the long run, if we at least live to our average life expectancy. The main issue in my mind is that we lose an important piece of longevity insurance. We permanently reduce our inflation-adjusted income stream for the rest of our lives, which could be critical if one of us should live a very long time, perhaps approaching 100 years.
What will we do? I think this decision depends a lot on how you think about the government. If you trust it to deliver, or believe that politicians of all stripes are too fearful of the aging baby boomer vote to ever cut existing benefits, then you’ll likely delay longer for larger benefits. And I think that summarizes our viewpoint, for the most part.
I will definitely wait until age 70 to claim my benefit. The mathematical analysis is just too clear that we’ll do better in the long run, by keeping some invaluable inflation-adjusted longevity insurance.
As for Caroline’s benefit, we may hedge our bets and take it earlier. Even though we would theoretically do better waiting until about her full retirement age. That said, Caroline is leaning against taking it this year at age 62. That would mean a relatively paltry benefit of only about $700. She wants to wait at least a few more years in order to push that number over $1,000 — a more substantial-sounding figure.
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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]
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Note: For many years, Pralana Consulting and Can I Retire Yet? were engaged in an informal technical collaboration aimed at raising standards for accuracy in retirement modeling, with no business relationship. However, as of January 2020 we have an affiliate relationship. That means, if you purchase a Pralana product here, a portion of the sale goes to support this site.
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