How do I Optimize My Social Security Claiming Decisions?

This is a weighty question. The points covered so far may help you better understand the Social Security system and how much monthly income you can expect. It gets more interesting when the time comes to claim benefits.

More strategy is needed because you can claim Social Security benefits between ages 62 and 70. There are some exceptions for widows and widowers. How do you determine the age in this eight-year window that makes the most sense for you? There is no one correct answer for all families, but there are some guiding principles. What follows comes from my own research on the topic as well as more in depth analysis from the authors Reichenstein and Meyer.

Single Individuals May Have an Easier Decision

The claiming decision is usually simpler for unmarried individuals than for married couples. The general rule is this: Your cumulative lifetime Social Security benefits are approximately the same at age 85 no matter when you begin your benefits. 

You might read that and think it doesn’t matter when you claim. But there could be reasons you would want to claim benefits earlier (closer to age 62) or later (closer to age 70).

• Factors in favor of earlier claiming: shorter life expectancy or higher real (after inflation) investment return assumptions.
• Factors in favor of delayed claiming: longer life expectancy or lower real investment return assumptions.

Your own personal circumstances will play a role, but it often comes down to looking at these two dimensions.

• Life Expectancy – you might roughly use age 85 as a baseline. If you expect to live much longer than 85, or simply want to plan for longevity, then consider if you can delay your claiming. If your life expectancy is much less than 85, then you likely have a strong case for claiming earlier.
• Investment Returns – this is a trickier and more nuanced concept. But let’s put it this way. For every year you delay claiming your Social Security benefits, you can expect an increase in your monthly income benefits of around 6 to 8 percent. If your investment assets are deployed in a way where you expect a much larger return relative to those Social Security increases, you might be inclined to claim earlier (closer to 62). Then vice versa (claim closer to 70) if you expect a much smaller relative return.

I understand if you don’t have much conviction in an expected investment return. One approach, if financially viable for you, is to take it one year at a time starting at 62. You might start with the intention of delaying your claiming. But you retain the option each year to claim depending on how your life and circumstances change. It’s tougher to undo a claim of benefits if you claim too early and change your mind later.

One More Thing for Married Couples to Fight About

The claiming decision is more complex for couples. We can’t get into all the combinations here, but here are two general rules I’ve found that often get to the essence.

Rule #1: For married couples with only one earner, it usually doesn’t pay to delay claiming for the earning spouse because it also delays benefits for the non-earning spouse.

This is because there is a spousal benefit interaction to consider. In a household with one earner, the non-earning spouse has the right to receive a spousal benefit approximately equal to one half the earning spouse’s benefit. The catch is that the earning spouse must claim benefits first. Delayed claiming could be sub-optimal in cases where the spousal benefit is postponed for too long.

However, if there’s a large age gap between the higher earning spouse and the lower earning one, consider the next rule.

Rule #2: The spouse with the higher PIA should begin benefits primarily based on the life expectancy of the younger spouse.

This one is less intuitive. But it comes down to factoring in Social Security’s survivor benefits. While there are nuanced rules here, generally the surviving spouse gets to continue receiving the higher of the two benefits that were paid while both spouses were alive.

Recall that life expectancy is a key factor for single individuals. It’s the same for couples, except think of it like a joint life expectancy. At the risk of sounding too much like an actuary, here’s another way to put it: if the lower earning spouse is expected to live well beyond the age the higher earner would have turned 85, the couple’s cumulative benefits are typically maximized if the higher earner delays the claim of benefits to age 70.

If that sounds too complicated, don’t worry. I encourage you to consult with a financial planner to help model your options and consider the latest rules and regulations around Social Security. Your planner can also help you consider other tax strategies that can tilt the decision towards earlier or later claiming. For example, delaying Social Security often make Roth IRA conversions more appealing in the early years of your retirement.