Social Security Decisions: How a New Tool Can Save You $150,000
My previous post described new software that helps individuals and financial planners analyze the best strategy for claiming Social Security benefits. To see how well it performed, I took the software for a spin.
I focused on married couples, because they need more complicated strategies for getting the most out of Social Security benefits. The strategies for singles are more straightforward.
First I'll explain a few features about Social Security benefits:
- Social Security benefits are set up so that each spouse receives his or her own Social Security income check; the household income is the sum of both spouse's incomes.
- Your Social Security income will be the greater of the benefit that is (a) based on your own wage history (called the "worker's benefit") or (b) an income that's based on 50 percent of the benefit generated by your spouse's wage history (called the "spouse's benefit").
- Spouses are not required to start benefits at the same time. In fact, there are situations where the best strategy is to start receiving benefits at different times, and in some circumstances, you can't start benefits at the same time.
- The worker's benefit receives delayed retirement credits for every month you postpone starting benefits until age 70. Once you attain age 70, delayed retirement credits no longer apply.
- The spouse's benefit increases for every year and month your spouse postpones starting benefits until your spouse attains his or her Full Retirement Age, which is currently age 66.
There are two special strategies that affect Social Security benefits for married couples:
- "Restricted application" is available once you reach your Full Retirement Age. Under this strategy, you can restrict your application to start just the spouse's benefit, which allows the worker's benefit -- that is, the benefit based on your own earnings history -- to earn delayed retirement credits.
- A "file and suspend" action is also available once you reach your Full Retirement Age. The spouse's benefit cannot be started until the primary wage earner has filed for his or her own benefits, but the worker can file for benefits and then immediately suspend those benefits. This allows the primary worker's benefit to earn delayed retirement credits while the spouse immediately begins drawing the spouse's benefit.
- The age of each spouse and, more important, the difference in age between the two
- The expected longevity of each spouse
- Whether one or both spouses worked a full career outside the home and the relative earnings of each spouse
Next page: How Much Is at Stake?
How Much Is at Stake
I started by analyzing my own situation. Both my wife and I have worked full time throughout our lives, although I had the higher earnings history. We are the same age, and our Full Retirement Age is age 66. We both expect above-average longevity, since we're very serious about taking care of our health. In fact, the website www.livingto100.com estimates that both of us will live well beyond age 90.
The system asked me for our expected Social Security incomes at age 66, which I obtained by using the calculator on the Social Security website.
I plugged this information into the software at www.socialsecuritytiming.com, and it estimated that there was more than $161,000 in our expected lifetime payouts at stake. This estimate represents the difference between making the optimum decision vs. making the worst decision.
The system showed me the top three strategies given our situation. The best strategy was for me to apply for my Social Security benefits at age 66 but immediately file and suspend them. This would allow my wife to file a restricted application to start her spouse's benefit when she reaches age 66 in order to begin receiving some income at that time. Both of us would continue to receive delayed retirement credits until we attain age 70, at which time we'd start those benefits.
Just to see what might happen under different circumstances, I gave the system the same information but said my wife was five years younger than me. Now the estimated amount at stake was more than $157,000, and the optimal strategy changed. In this case, the software told us to have my wife start her benefits as soon as possible, and suggested that I file a restricted application to receive the spouse's benefit based on her earnings; this gets some income coming in as soon as possible. I would continue to earn delayed retirement credits on my own earnings history, and when I attain age 70, I'd start the benefit based on my own earnings history.
Then, I tried a third scenario: I said my wife was five years younger than me and didn't work outside the home at all. In this situation, the amount at stake was more than $278,000!
As you can see from the above examples, there's a lot at stake regarding your decision about when to start Social Security. It's really well worth your effort to learn as much as you can so you can get the most out of your Social Security benefits, and it's well worth paying an advisor if you need help with this decision.
More on MoneyWatch:
- A Great New Tool for Deciding When to Take Social Security
- When Should You Start Social Security? Do the Math!
- What You Need to Know About Social Security
- How to Take Spousal Benefit
