When Should I Take Social Security?

For years the Social Security Administration urged retirees to take Social Security as soon as possible, even though doing so meant permanently receiving lower benefits. Here’s what they’ve said: “From an actuarial perspective, it doesn’t matter when you start collecting. But you may die early and regret (hopefully, in heaven) having waited, so don’t take the chance of dying before collecting. Take your benefits early.”

This advice and logic was as bad as it got. As far as we know no one has any regrets in heaven or needs any money.

Fortunately, thanks, in part, to discussions we've had with their Chief Actuary, Social Security is no longer twisting people’s arms to take benefits early. The reason to wait is that by doing so you are effectively buying more longevity insurance – more insurance against living longer than expected. (But, as described below, waiting to collect all your possible benefits is generally not the best policy).

None of us can count on dying on time. And if you’re married, the chances you and your spouse will both die on time are even smaller. Indeed, for 65 year-old married couples, there’s a better than even chance that at least one member will live to his or her early nineties.

We need to plan to live to our maximum age of life, not our expected (average) age of life. For most of us, our maximum age of life is 100 or greater. Why should we plan to live so long? -- for the simple reason that we might.

This is no different from planning for the possibility of our house burning down. Most likely it won’t happen. But if it does, we want to protect ourselves – our living standards – against that outcome. Imagine the government telling you, “Don’t buy homeowners insurance. At best it’s a break-even proposition on an actuarial basis, and you’ll lose money if your house doesn’t burn.”

If we cared just about what we expect to happen (our house not burning), this advice would be reasonable. But we do care about bad things happening, even if we know they won’t happen on average. Here’s the reason: we’re risk averse -- we care more about the downside than we do about the upside.

The downside in the game of life is living too long. If we don’t insure against an extended stay here on earth by acquiring insurance policies that pay more the longer we live, we run the risk of outliving our money.

To repeat: waiting to collect Social Security (with the strong caveats discussed below) lets us buy more longevity insurance in the form of a higher benefit. The price we pay for this extra insurance policy -- the premium -- comes in the form of foregoing benefits in the short term. Uncle Sam is a particularly attractive insurance agent because he charges very inexpensive premiums and sells fully inflation-indexed insurance policies and the company he represents – the federal government – is highly reliable (at least when it comes to paying the Social Security benefits it owes).

If you haven’t yet started collecting, what’s the best option?

If you are cash-constrained (also called borrowing-constrained or liquidity-constrained), ESPlanner can show you the trade off between sacrificing a portion of your current living standard in order to have a higher living standard once you do start to collect benefits. If you aren’t constrained, ESPlanner can show you precisely how much your living standard will immediately and permanently rise by waiting to collect based, again, on ESPlanner’s planning horizon, which extends to your maximum age of life.

If you are married and aren’t borrowing constrained (or are constrained, but can tolerate a temporarily lower living standard), Social Security provides a terrific opportunity to collect spousal benefits for free, i.e., without having them reduced based on receipt of your own retirement benefit and without being forced to take your own retirement benefit early.

Let’s assume the husband has been the big earner. The strategy is a) you both wait beyond your ages of full retirement, but not beyond age 70, to begin collecting your retirement benefits. By waiting you ensure higher retirement benefits as indicated above, b) when the husband reaches his age of full retirement he applies for, but immediately suspends receipt of his retirement benefit, and c) as soon as the wife reaches her age of full retirement eligibility, she applies for spousal benefits and only spousal benefits.

ESPlanner lets you separately input the ages at which you will first begin collecting spousal, retirement, and widows/widowers benefits.

One question you might have at this point is whether a) both spouses can apply for and suspend receipt of their retirement benefits at their full retirement ages, b) both apply for spousal benefits, and c) both collect spousal benefits for free. The answer is no. If the husband applies for spousal benefits, he’ll get none since his own benefit will exceed half of his wife’s benefit and even though he’s suspended the receipt of his benefit (to let it grow due to the actuarial increase from waiting to actually receive his checks), his phantom own retirement benefit will be used to reduce (in this case by 100 percent) his potential spousal benefit.

This sounds weird, but it’s true. You won’t find the term “phantom benefit” being used by Social Security, but this is the best word we’ve come up with to describe what actually happens. We checked with the top actuary on this at Social Security and also confirmed his statements from carefully reading sections of Social Security’s incredibly cryptic POMs (Program Operations Manual System).

Note also that if the wife were to apply and suspend, she’ll no longer receive her spousal benefit for free. It will be reduced dollar for dollar by her own phantom retirement benefit. So, only the husband (i.e., the high earner) should apply and suspend at full retirement age.

Divorcees are treated differently. Both ex's can collect "free" spousal benefits. As soon as an ex - call him Joe, hits age 62, his ex, call her Sally becomes eligible to collect spousal benefits. This is a good and a bad thing for Sally. The good thing is that if Sally reaches full retirement age and hasn't applied for her own retirement benefit, she can, at full retirement age, apply just for her spousal benefit and wait until 70 to collect her highest possible retirement benefit. The bad thing is that if Sally tries to collect her retirement benefit early and Joe is already 62 when she does so, Sally will be deemed to be applying for her spousal benefit as well. In this case, Sally's retirement benefit will be reduced as will her spousal benefit, if it's actually positive. If Sally's older than Joe, then she can go for her retirement benefit before Joe hits 62 and not be forced to take her spousal benefit as well. In this case, she can wait until full retirement age to apply for her spousal benefit even if Joe hits 62 before Sally reaches full retirement.

We're sorry this is so incredibly complex and convoluted, but don't blame us.

But we're not done yet. We need to ask two more questions. First, is it always best for the low earning spouse to be the one to collect spousal benefits and have the higher earning spouse always file and suspend? No, not if the higher earning spouse is younger. Then it may be better for the higher earning spouse to collect the free spousal benefits because he/she will be collecting for more years than would be the case if the other spouse went for the free spousal benefits. Again, the software can let you try different options and see which is best.

The second question is whether it might be optimal for one spouse (say the wife) to collect retirement benefits early, say at 62, and then wait until full retirement to collect unreduced spousal benefits from that point forward. This is feasible if the other spouse (the husband) isn't collecting his retirement benefit at the time the wife applies for her spousal benefit. And if the husband starts collecting his retirement benefit before the wife reaches full retirement age, nothing changes. The deeming of spousal benefits is based only on the husband's retirement benefit collection status precisely at the time the wife applies for her retirement benefit.

Now what happens if a spouse dies? Well, the best strategy for the survivor depends on whether the survivor was the high earner or not. In general, you should know that you can apply for a survivor benefit independent of applying for your retirement benefit. I.e., applying for one, won’t trigger application of the other. (This is not the case, by the way, for spousal benefits for spouses under their ages of full retirement. Spouses who are below the age of full retirement and do apply for spousal benefits will be deemed by Social Security to also be applying for retirement benefits and vice versa. So applying before full retirement age for either a spousal benefit or a retirement benefit means you are applying for both and are electing to have both benefits permanently reduced because you took them early.)

If the husband (the assumed high earner) is the widower and sets his age of initial retirement benefit collection at age 62 or older, ESPlanner will start giving him survivor benefits at age 60 or immediately if he first becomes widowed after age 60. Prior to reaching his age of initial own retirement benefit collection, these survivor benefits will be freebees. The reason is that they won’t be reduced due his collection of his own retirement benefit. Once he starts collecting his own retirement benefit, doing so will wipe out his survivor benefit. Thus, the way to maximize this widower’s free benefits as well as his own retirement benefit is for him to start collecting his widow’s benefit as soon as possible (age 60 is the earliest possible age) and wait as long as possible – to age 70 – to start collecting his own retirement benefit. This is what ESPlanner does.

For the wife (the assumed low earner), things are more complicated as ESPlanner’s treatment differs to make sure that the best outcome is achieved for the wife as well. For the surviving wife, it’s potentially the case that her potential survivor benefit is larger than her potential own retirement benefit. In this case, we don’t necessarily want to start her survivor benefit before she reaches her age of full retirement because starting survivor benefits early will mean they will be permanently reduced; this isn’t a good thing since she’s likely to be collecting these benefits for the rest of her life. If she has delayed taking her own retirement benefit until after her full retirement age, then ESPlanner assumes that she has applied for survivor benefits, but not for retirement benefits, at her full retirement age. She will start receiving both her retirement benefits and survivor benefits at her age of initial benefit collection as provided to ESPlanner.

If this discussion is confusing, reread it several times. It’s confusing, but correct as can be verified by a) reading Social Security’s Handbook, b) going suicidal, c) moving onto the rules specified in the POMS (Programs Operations Manual System, which are posted at https://secure.ssa.gov/apps10/poms.nsf/partlist!OpenView), and d) then triple-checking by calling Social Security’s Office of the Actuary.

Illustrating ESPlanner’s Benefit Calculations

Here’s an example of the free spousal benefits ESPlanner calculates, where available. It’s 2008. Sally is age 62, Joe is age 64. Sally and Joe both tell ESPlanner they are going to work until age 65, but wait until age 70 to start collecting their Social Security retirement benefits. When Joe hits his full retirement age – age 66, the program assumes he’ll apply for and suspend his retirement benefits. When this occurs, Sally will be age 64. The program will give her spousal benefits starting at 66 and continuing through age 69. Once she hits age 70, she’ll start receiving her own retirement benefit.

Joe’s done decently over the years and has earned $100k per year from age 30 until age 65. Sally has earned $10k per year from age 30 until age 65 from a small business of her own. ESPlanner calculates that Sally gets a $13,143 per year “free” spousal benefit from age 66 through age 69 for a total of $52, 572, all in today’s dollars. Once Sally starts collecting her retirement benefit, she gets $16,668 per year (her own retirement benefit of $14,537 plus an “excess” spousal benefit of $2,113). Were Sally to collect her retirement benefit at 65, she would receive only $13,143 (her own retirement benefit of $11,013 plus an “excess” spousal benefit of $2,131) per year on a permanent basis.

Here’s an example of the free survivor benefits ESPlanner calculates for the high earner. Our players are the same, but in 2008, Sally gets killed by a meteor strike while working in a local soup kitchen feeding the homeless. Joe still collects his own benefits at age 70, but due to Sally’s untimely demise, Joe collects $3,084 per year in survivor benefits from age 65 to age 69 and his own retirement benefit of $34,699 per year from age 70 on. ESPlanner realizes that Joe can start collecting survivor benefits as soon as Sally dies and will only have him start receiving his retirement benefit when he says he wants to start doing so. Once Joe begins collecting his retirement benefit at 70, the program will check if Joe is eligible to still receive survivor benefits. But in our example, Joe’s own retirement benefit exceeds his survivor benefit, meaning that he receives no survivor benefit post age 70.

Were Joe to tell the program that he wished to start collecting his Social Security retirement benefit at 65, the program would correctly show that Joe, as a widower, would receive no survivor benefit between ages 65 and 69 because his own retirement benefit exceeds and, thus, wipes out, his survivor benefit.

Here’s an example of the free survivor benefits ESPlanner calculates for the low earner. Our players are the same, but in 2008, Joe gets struck in the temple by a wild cue ball while out playing pool with his buddies and dies. Sally still collects her own retirement benefit at age 70, but due to Joe’s untimely demise, she collects $26,287 per year in survivor benefit from age 66 (her age of full retirement) to age 69 and the same net benefit of $26,287 (her own retirement benefit of $14,537 and the “excess” survivor benefit of $11,750) from age 70 on. ESPlanner knows that Sally can, without running afoul of the deemed filing provisions, file for survivor benefits at her age of full retirement.

Note that Sally’s net benefit, $26,287, remains the same before and after age 70 because her survivor benefit is larger than her own retirement benefit and Social Security limits her net benefit to the maximum of the two. The survivor benefit received by Sally from age 66 to age 69 is “free” in the sense that her own retirement benefit has not been subtracted from her survivor benefit. She could have as easily received her retirement benefit at age 66. She would receive the same net benefit of $26,287. ESPlanner simply makes sure that she doesn’t leave anything on the table by collecting her retirement benefits late.