What would you guess your Social Security benefits are worth; a few hundred thousand dollars, maybe?
Would it surprise you to know that over 25 years the average single person could receive $500,000 or more in total Social Security benefits? Many married couples will get over a million dollars.
According to the Social Security office, in 2020, the average monthly Social Security retirement benefit is about $1500. That’s $18,000 a year. If you were a high-wage earner, the maximum monthly benefit for someone who had reached Full Retirement Age (or FRA) is $3000 – or $36,000 per year. And, you can get even more by waiting until age 70 to begin benefits.
When deciding when to start benefits, you also need to consider inflation. In 1975 Social Security benefits began to include an inflation adjustment, which means your benefits increase as prices rise (prices as measured by the Consumer Price Index, called the CPI-W).
Historically benefits have increased at an annual rate of about 3.5%, although since 2009, with two notable exceptions, increases have been less than 2% a year. If you take the average benefit of $18,000 a year increasing at 2% a year for 25 years, you will receive $576.545 in cumulative dollars. If you’re a high wage earner, retire and receive $3,000 a month increasing at 2% a year for 25 years that adds up to $1,153,091.
It’s a big pot of money. By making a wise decision, you can increase the size of the pot. Let’s take a look at the factors to consider when deciding when to start your Social Security.
Academics have examined this critical decision from every possible angle and there is overwhelming evidence that for most people taking benefits at the earliest possible claiming age is not the wisest choice.
In this article, we’ll look at the key factors that apply to Singles, Married Couples (or those with a prior marriage lasting ten years or more), and Widows or Widowers.
Are you single with no prior marriages lasting ten years or longer? There are two key things you should know before you begin Social Security.
- Your probability of living past your mid-80’s.
- Your FRA and how it interacts with the earnings limit.
First, let’s look at longevity.
How likely do you think it is that a 60-year-old single female will live to 85?
If you look at data from 2014 mortality tables, you see there is a 60% chance. If you narrow the data set to white-collar workers only, the odds go up to 64%.
A 60-year-old male has a 51% likelihood of living to 85, which goes up to 58% for the white-collar only data set.
Those are high odds. Many people make decisions about money with an off-hand comment such as “Well, I might not live that long.” That’s like betting against the odds. If you’re in good health and you have more than a 50% probability of living past age 85, you’ll get more cumulative dollars by starting benefits later rather than as early as possible.
How can you hold off starting benefits until a later age? Consider withdrawing from retirement accounts early and delaying the start of Social Security until age 70. For many, this approach can increase overall wealth, reduce your odds of running out of money, and provide more guaranteed, inflation-adjusted income later in life – and thus more security.
Next, consider the earnings limit.
If you are working and begin benefits before your FRA, if you earn too much, you’ll owe back some of your benefits. This rule is called the Social Security earnings limit. The great news is once you attain your FRA, you can earn any amount without being subject to the earnings limit.
Your date of birth determines your FRA. For those born January 2, 1943, to January 1, 1954, your Full Retirement Age is 66. If you’re born outside that range, see the Full Retirement Age chart on ssa.gov.sa.gov.
Note that the earnings limit is not a tax. If you lose benefits because of the earnings limit, they will be slowly paid back to you once you reach FRA. There are also taxes on benefits, which is an entirely different set of rules than the earnings limit.
Married (Or Divorced)
Born ON or BEFORE January 1, 1954
If married, were you or your spouse born ON or BEFORE January 1, 1954? If so, you are grandfathered into the ability to use a “double-dipping” strategy that those born later can’t use. This double-dipping also applies if you have a prior marriage that was at least ten years in length, and you are not remarried.
This strategy works if both spouses worked and paid into Social Security, and here’s how:
One spouse (usually the lower earner of the two) begins benefits, usually somewhere between age 62 and their FRA. The other spouse (usually the higher earner) must reach their FRA about the same time – and when they do, they file a restricted application for spousal benefits only. Their benefit remains on hold, so when they reach age 70, they can switch over to it – and naturally, it will be a larger monthly amount at age 70. Depending on the age differential between you and your spouse, there can be nuances as to who files first. It is best to run your scenario through an online Social Security calculator before making a final decision.
If you’re looking at a spousal benefit on an ex, here’s the difference. When you’re married, your spouse MUST file for their benefits before you can collect a spousal benefit. With an ex-spouse, your ex did not have to file for you to be eligible for a spousal benefit. (But they must have reached the age of eligibility (usually 62), and you must have been divorced two years or more.
You also MUST have reached your FRA to use this restricted application approach, and it doesn’t work if you were born on January 2, 1954, or later.
Born on or after January 2, 1954
With the November 2015 changes to the Social Security rules, there aren’t as many complex claiming options for those born on or after January 2, 1954.
It is best to start with the odds that one or both of you will live to age 85 and beyond. Those odds are 80%. It goes up to 85% when looking at just the white-collar data set.
What about the likelihood that one of you will live to 90? There’s a 58% chance and it increases to 65% for white-collar retirees.
Here’s a summary of who might use a particular strategy:
- If you want to get the most income from a scenario where you are both long-lived, you’ll both wait until age 70 to begin benefits.
- If you want to hedge a bit, and have a scenario that works well in the event one spouse lives longer and the other passes around their mid-80’s or earlier, than typically the lower earner starts benefits at their FRA, and the higher earner delays until age 70.
- And if only one of you worked, then the non-working spouse can still file for a spousal benefit when the working spouse begins their retirement benefits.
The summary above is simplified. It’s always best to get personalized advice. Claiming Social Security is a permanent decision – it’s worth it to take the time to analyze your options and make a thoughtful choice.
Widow or Widower
If you are a widow or widower who did not remarry before age 60, and you and your late spouse worked, you have a unique claiming option that is not available to everyone.
Usually, when you file for Social Security benefits, you are deemed to be filing for all benefits you are eligible for (except for those born on or before January 1, 1954, who use the restricted application). However, widows and widowers have a unique option – they can file a restricted application regardless of their date of birth, and they do NOT have to wait until their FRA to use this claiming strategy. A widow or widower can CHOOSE to apply for only one benefit type – either their own or the survivor benefit – and that preserves their option to later switch to the other benefit type.
That means a widow who is no longer working can start her survivor benefit at age 60 (it would be a reduced benefit because she is starting early) then at age 70 switch over to her own retirement benefit. There are many variations of this approach. For example, in cases where the deceased spouse was a much higher earner, it may make sense for the survivor to start their retirement benefit at age 62, then switch to their widow/widower benefit at their FRA.
For those looking for personal advice, Sensible Money offers customized retirement income plans where we provide a recommended Social Security claiming plan that considers taxes, your other accounts, pensions, and much more. Visit our Services page to learn more.