Ask Bob: When Should I Claim Social Security Benefits?

Question: I'm trying to decide whether I should 1) delay applying for Social Security beyond full retirement age (FRA) so that I receive delayed retirement credits of 8% per year, withdrawing money from my IRA as needed, or 2) apply for Social Security sooner so I can maximize the total amount of income I receive from Social Security.

I earned a fairly decent salary until a 2006 layoff. Since then, I have only had about five years with earnings over $10,000 per year due to health issues and relocations for my wife's job. I am now unable to work due to health issues but since I have not had enough consistent work quarters, I cannot apply for disability; it has been since 2011-2013 I last worked to any significant degree.

My wife is a year younger than me. She immigrated from Canada and we married later in life after divorces that resulted in both of us ending up, financially, back at zero. She has only 20 years in the Social Security system with her first 10 years of modest wages. Her final years are now hitting a higher wage level, so she plans to work to age 66 and then possibly part time for a few years.

I rolled my 401(k) over to an IRA which is mostly cash now and small percent in the market sitting around $400,000. My wife is continuing to max out her 401(k) which should end up over $500,000 by the time she retires.

Due to our late start we still have a fairly hefty 30-year mortgage with about one-third of it paid off. Fortunately, we have very little other debt. We live modestly and have been planning to do some traveling once we both retire.

With my health issues, I am not looking at a long life span, although my parents both lived into their early 90s, I will be lucky to get into my late 80s.

I've run some scenarios of taking my Social Security in June when I turn 65 which will give me about $25,000 per year. If I push off my retirement until 70, my benefit goes up to around $35,000, but then I've given up five years of income at $25,000 per year or - not accounting for cost-living-adjustments -- $125,000 total. But my overall total amount from Social Security will actually be less if I wait. By the way, I used age 90 for my life expectancy in all the scenarios I ran.

The way I look at is if I start my Social Security draw at 65, then I get 25 years. If I withdraw starting at age 70, I get only 20 years of benefits. But if I hold off, my actual annual cash flow improves by 8% per year that I hold off.

The other option I have is to start taking distributions from my IRA as needed starting next year and then hold off on applying for Social Security to let it accrue since it earns 8% while my IRA earns maybe as little as 4%. From what I understand, Social Security benefits are only 85% taxable but my IRA is 100% taxable.

We want to maximize our retirement income to ensure we do not need to do something drastic like sell the house.

Here are some more facts and circumstances about my wife and me.

I was born in 1953 and my current income is zero. My primary insurance amount or PIA as of May 2017 is $2,229 per month and my best estimate life expectancy is 88.

My spouse was born in 1954 and has current income of $100,000. Her PIA as of May 2017 was $1,980 per month and her best estimate life expectancy is 94.

Due to the stress of her job, my wife would like to retire and apply for Social Security at age 66 or 67. She might work part time once we relocate to a less expensive area.

Our current mortgage payment, including all taxes, insurance and fees, is $2000 per month but we are planning to relocate to a less expensive part of the country. We have no dependents and our children are fairly spread out, so we are free to relocate anywhere.

I was previously married for 19 years and my current wife was previously married for 10 years in Canada. Neither of our ex-spouses has died. My ex was born in 1952, is still working and generally has earned significantly less than me except for the last four to five years. My wife's ex is Canadian, just recently retired, born in 1952. My current wife may have a small Canadian retirement available, I'm guessing it might be around $200 per month.

Neither of us has any cash value insurance and I estimate that the value of our retirement account will be close to $1 million by the time my wife retires at age 66 or 67. - Arthur and Nancy.

Answer: To help us answer Arthur's question, we asked William Reichenstein, a professor at Baylor University and a principal with Social Security Solutions, to run the numbers and do the analysis.

Here's what he had to say:

Arthur and Nancy have been married for 20 years. They are each in their second marriage, but neither spouse is eligible for spousal benefits based on their ex-spouse's earnings record. Due to health issues, Arthur was forced to retire years ago. Nancy earns about $100,000 per year and plans to retire at 66 or 67. They are seeking help to determine when each partner should begin Social Security benefits.

Arthur was born in 1953. He has a primary insurance amount (PIA) of $2,229, where PIA is his monthly retirement benefits if Social Security benefits are begun at his full retirement age of 66. His life expectancy is 88. Nancy was born in 1954. She has a PIA of $1,980, FRA of 66, and life expectancy of 94.

Different sets of rules affect each spouse. Because Arthur was born Jan. 1, 1954 or earlier, he can file a restricted application for one type of benefits (in this case, spousal benefits) at FRA or later as long as Nancy has filed for her own retirement benefits, and later switch to his own retirement benefits.

Because Nancy was born after Jan. 1, 1954, she cannot file a restricted application for one type of benefit. Rather, whenever she applies for benefits, she is deemed to be applying for all benefits.

Their lifetime maximizing strategy based on their life expectancies calls for Nancy to file for her retirement benefits of $1,969 per month in January 2020, the month before she turns FRA.

In January 2020, Arthur files a restricted application for $990, half of Nancy's PIA. At 70, Arthur switches to his own retirement benefits of $2,942, which is 32% more than his PIA. After Arthur's  death, Nancy continues to get Arthur's benefits of $2,942 per month.

All benefits are expressed before cost-of-living adjustments. So, cumulative lifetime benefits are pretax benefits in terms of today's purchasing power. The earnings test prevents Nancy from beginning benefits before January 2020, which is one month before she hits FRA.

In 2018, the earnings test allows her to earn $45,360 in January -- that is, through the month before she turns FRA, without losing any benefits. By beginning her retirement benefits in January 2020, Arthur gets an extra month of spousal benefits than if Nancy waited until her FRA in February 2020.

The table below compares the relative advantages or disadvantages in terms of their joint cumulative benefits from the recommended strategy and the FRA strategy, where both spouses claim their retirement benefits at 66. It then presents the advantage of the "recommended strategy" compared to the age 70 strategy, where both spouses claim their retirement benefits at 70. It shows the cumulative advantage or disadvantage of the recommended strategy at the end of 2024 (the year Nancy turns 70), 2041 (the year Arthur is expected to die), and in February 2048 (the month Nancy is expected to die).

In the FRA strategy, Arthur begins his retirement benefits at age 66 of $2,229 per month, which is considerably more than the $990 he gets in the recommended strategy in most months before he turns 70. Thus, in their early retirement years, the FRA strategy provides a cumulative lifetime relative advantage. However, by the time Nancy is about 77, the recommended strategy provides the higher cumulative lifetime benefits. Based on their projected lifetimes, the recommended strategy would provide $143,858 more in lifetime benefits.

In the age 70 strategy, Nancy gets no benefits until age 70, but she then gets $2,614 per month in benefits. Thus, in the early years, this strategy provides far fewer joint lifetime benefits than the recommended strategy. They would both have to live to the time that Arthur turns 89 for Strategy 70 to provide more in lifetime benefits than the recommended strategy.

There is, of course, substantial uncertainty about most retirees' lifespans. However, as a rule of thumb, the higher-PIA spouse -- Arthur in this case -- should base the age he begins retirement benefits on the age he would be when the second spouse dies. Thus, he has a stronger incentive to delay his retirement benefits until 70.

By delaying these benefits from FRA of 66 to 70, he gets $2,942 more per month in benefits instead of $2,229, and these additional benefits last until the last spouse dies. Simple math shows the break-even age is 82½. That is, if either spouse lives to at least the age that Arthur would be 82½ then he should delay his benefits from 66 to 70. Due to the different sets of rules affecting each person depending upon his or her birth date, which was discussed in part earlier, this rule of thumb is not absolute. However, it applies to most retired couples including this couple. And it applies to all retired single individuals (who are not eligible for spousal benefits based on a divorced ex-spouse's earnings record or survivor benefits based on a deceased spouse's earnings record).

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