[Editor's Note: Today's guest post about when to claim Social Security was submitted by David Graham, MD, a physician blogger, and advice-only financial planner. If you want the “TL;DR version” read the last paragraph. Because when all is said and done, the primary value of social security is as longevity insurance. So it's a bit like Pascal's Wager. If you live a long time, you'll be glad you waited to claim. If you die early, it doesn't matter because you won't run out of money anyway. Enjoy the post. We have no financial relationship.]
Almost 2 years ago, White Coat Investor hosted a Pro/Con post about when to take Social Security. Dr. Cory S. Fawcett argued to take Social Security at 62 years of age, and Dr. Dahle at age 70.
The scenario focused on a single high-income earner who retired at 62. Dr. Fawcett suggests taking Social Security early allows more spending early in retirement, or more time to invest. Dr. Dahle feels taking Social Security at 70 is superior as it guarantees returns, allows Roth conversions, and provides longevity insurance.
When Should You Take Social Security? 62 or 70?
So, who is right? Obviously, individual circumstances make all the difference, but let’s use professional financial planning software and run the numbers.
Retiree Assumptions
The good doctors agreed to use a $2M nest egg composed of 60% tax-deferred, 30% taxable, and 10% Roth. The index retiree draws on this nest egg starting at age 62. In general, it is most efficient to utilize the taxable account first, tax-deferred assets next, and tax-free assets last.
Beyond that, I have to make a few other assumptions. Spending is $90,000 a year—a 4.5% withdrawal rate on the portfolio. Additional medical expenses start at $5,000 a year and increase by 5% a year. Otherwise, inflation is 2% a year. The primary insurance amount (PIA—how much one gets from Social Security a month at full retirement age) is $2,800.
Stocks pay 7% (2% of which are dividends) and bonds 4%. Assume a 60/40 stock/bond portfolio, with the Roth 100% invested in stocks, and the other two accounts a mix of stocks and bonds to keep the overall asset allocation at target.
In addition, a $34,000 yearly distribution is taken from the IRA from age 62-69. This distribution increases 2% a year to keep up with inflation. An explanation for including this distribution is found near the end of this post.
Results
With the above assumptions, taking Social Security at age 62 (henceforth called SS62) has Monte Carlo success odds of 62% vs 69% with delaying Social Security to 70 (SS70). These odds are slightly low, but I have chosen to model an aggressive withdrawal percentage from the portfolio.
Portfolio Value over 30 Years
Figure 1 (Portfolio value over 30 years)
As seen in figure 1, SS62 (light green) increases in value for about 20 years, and then slowly decreases to an end balance of $1.6M. In contrast, SS70 decreases in value until payments start at 70, then does better and finishes with $1.95M.
The cross over point—where SS70 is worth more than SS62—is 84 years of age (22 years after retirement). After 30 years, the SS70 portfolios is worth about $350,000 more than SS62.
Source of Retirement Income of SS62 and SS70
Figure 2 shows the source of income, which increases at 2% (5% for healthcare) to cover expenses. Purple represents Social Security income and orange withdrawals on the portfolio. Over the 30 year period, SS62 gets 20% of total income from Social Security, whereas SS70 gets 28%.
Withdrawal Percentage of SS62 and SS70
Seen above, SS62 starts at a 4.5% withdrawal rate and winds up over 10% after 30 years. SS70 has about a 5.5% initial withdrawal rate which then dips down at age 70, and slowly increases over time. Note the scale are slightly different, and SS70 winds up at about 7.5%, a lower rate than SS62.
What About Taxes in Retirement?
Taxes are an important issue to look at in retirement. Unlike in working years, retirees have amazing tax flexibility during retirement. The ability to control taxable income stems from the ability to withdrawal from different types of accounts.
In the current scenario, a Roth account grows in the background undisturbed. Instead, money primarily comes from Social Security and the brokerage account, in addition to distributions from the IRA prior to the age of 70, and required minimum distributions (RMDs) from the IRA after age 70.
Figure 4 shows the yearly taxes due with SS62 (light green) and SS70 (blue). Initially, SS70 pays less taxes (since part of the Social Security in SS62 is taxed) until RMDs force taxable income out of the IRA at age 70.
David Graham, MD
Taxes increase again for SS70 at age 79. Also, note that taxes increase for SS62 at age 82. Reviewing cash flow, this occurs when the brokerage account reaches zero and all income comes from the taxable IRA. Early claiming of Social Security kept the brokerage account around for 3 years longer in this scenario.
Overall—over the 30-year period—SS62 is actually more tax-efficient, saving about $7,000 or $250 a year in taxes.
What about Roth Conversions?
Partial Roth conversions are useful to convert pre-tax money (such as IRAs and 401k) into never-taxable money (Roth). Roth conversions force you pay taxes the year you convert, but then you never have to pay taxes on the conversions again. Frequently, partial Roth conversions can be useful to lower future RMDs and decrease the overall lifetime tax burden.
Figure 5 (The tax planning window for partial Roth conversions)
As seen above, green shows the taxable income, and the lines demonstrate the different tax brackets. Note the lower number (ie 10, 12, 22, and 24) are the current tax brackets with the Tax Cut and Job Act. This act expires in 2026 which results in the increased tax rates seen (10, 15, 25, 28).
From age 62-70, taxes remain in the 12% bracket. Staying in the 12% tax bracket keeps the dividends and capital gains rate at a favorable 0%. Income is obtained from a yearly taxable $34,000 distribution from the IRA, and from withdrawals from the brokerage account.
The pre-70 years of age distribution from the IRA is optimal for several reasons. First, without it, the brokerage account rapidly expires and forced taxes up into the 24% tax bracket. Second, by taking out pre-tax IRA funds, taxes stay in the 12% tax bracket until age 70. At that point, RMDs kick in and taxes increase from the 12% bracket into the 22% bracket.
In summary: the pre-70 age distributions decrease lifetime total taxes paid. I use $34,000 in this example, but unfortunately, the actual number needs to be calculated each year depending on other income.
Moreover, is it optimal to stay in the 12% bracket in this scenario, which makes partial Roth conversion tax-inefficient.
Income is not taken from the Roth account. This results in $1.2M in Roth funds after 30 years. Since more than half of the portfolio is left in Roth, aggressive partial Roth conversions are not indicated.
Often, when optimizing an individual retiree’s plan, a Roth funds some retirement expenses. This allows spending flexibility without increasing taxable income for the times taxable income needs to be below certain thresholds.
Taxes and Roth conversions are obviously complicated. While not mentioning other tax implications of retirement income planning, let’s briefly look at taxation of Social Security.
Taxation of Social Security
Your favorite Uncle taxes Social Security. In fact, when “combined income” is above $34,000 for a single filer ($44,000 for couples), up to 85% of Social Security is included in taxable income. To calculate combined income: take adjusted gross income + half of Social Security benefits + nontaxable interest (such as municipal bond coupons). Most high-income earners should assume they will have up to 85% of their Social Security taxed, as is the case for both SS62 and SS70.
Income from Social Security
Figure 6 (Total income over time from Social Security)
Over time, see the total absolute income from Social Security in figure 6. In grey, SS62 starts at 62 and has a flat slope. In blue, SS70 starts at 70 and the increased slope reflects its higher payment. At age 78, 16 years after retirement, you get more absolute income from SS70 than SS62.
Above, in figure 7, see yearly income from Social Security. SS62 is again in grey, and SS70 in Blue. SS62 starts at about $25k a year and increases to almost $50k after 30 years. With SS70, benefits start at $50k and increase to $76k after 22 years. In the end, there is $431k more absolute income taking Social Security at 70 than at 62 years of age.
What about Sequence of Return Risk?
Figure 8 (Effect of Sequence of Return Risk)
It is fun to look at sequence of return risk and consider Social Security claiming strategy. What if a 2000-2010 scenario happened just at retirement?
Above, you can see SS62 in light green initially does better than SS70 in blue. This is due to the fact that income from Social Security allows you to sell less equity when it is down due to a poor sequence of returns.
Due to the initial sizeable hit in the portfolio, however, neither makes it 30 years, though the SS70 shows its usefulness as longevity insurance.
A Quick Primer on Social Security
For those born after 1960, full retirement age is 67. You get your PIA (primary insurance amount) if you wait until your full retirement age.
If you claim after, you get 8% simple interest every year you delay until 70. So, you can get 24% more delaying Social Security 3 years beyond your full retirement age. Beyond 70 there are no additional increases, so it never makes sense to delay Social Security past 70.
If you claim early, you lose 5/9 of 1% for each month you claim early, up to 3 years. This is a 20% decrease in your PIA if you claim at 64.
You can claim as early as 62, in which case you get a 30% decrease in your PIA, or 5/12 of 1% for each month you claim early between 36 and 60 months.
To know when the right time to claim, you must know how long you are going to live. Since that is a guess, do you want a smaller benefit sooner or a larger benefit later?
My Thoughts About the Scenario and Assumptions Made
Social Security claiming strategy is complicated even for a single, well-to-do retiree. In this scenario, I selected a healthy withdrawal rate from the portfolio since Dr. Fawcett suggests that an early claiming strategy allows you to spend more earlier in retirement, or gives your investments time to grow.
In addition, some would suggest my return assumptions (7% for stocks and 4% for bonds) are too low. Perhaps it is better to plan conservatively and be happily surprised if everything works out better than planned.
As a side note, investing the relatively small amount you get from Social Security at 62 and expecting it to compound equivalent to the much larger benefit at 70 reminds me of savings rate in FIRE. For the 8 years you are investing Social Security returns with an early claiming strategy, there just is not enough money or time for higher return assumptions to make that much of a difference. To compound, you need time and a significant amount of money to start with. It is unlikely the “take it early and invest it” philosophy will be a winner over a guaranteed 24% higher payout.
What Did We Learn?
In absolute dollars received from Social Security, it takes 16 years to make more money with a delayed strategy, right at about $500,000 paid out (as per figure 6).
However, (as per figure 1) it takes 22 years for portfolio size to actually catch up. That is, the 8-year investing head start buys 6 extra years where portfolio size is larger due to claiming early.
Another way to say this, at least in this scenario, you have to live to about 85 to make a delayed claiming strategy make sense.
Take Less Social Security Now or More Later?
Don’t ignore Social Security in your future projections. It is clear Social Security will change over time but it is difficult to predict the future.
Your choice: take less now or more later? Even for a single, well-to-do physician, the decision is a difficult one.
It will take 16 years to catch up in absolute terms. If the money is invested, it takes 22 years. Do you plan to live that long after retirement?
Social Security, as it is indexed to a measure of inflation, is the best cost-of-life-adjusted annuity around. There is no annuity on the market nearly as good.
If you might live a while, a delayed claiming strategy makes sense. As money is fungible, you can spend other assets and postpone Social Security. The guaranteed return on investment is sweet. And if you die early, you won’t need the money anyway. But if you live a long and glamorous life, you might just be glad you waited.
When do you think is the right time to take Social Security? Do you plan on delaying or taking early? Comment below!
Thank you for a very interesting and thorough review of the Social Security question.
I believe that best time to take Social Security is more based on personal factors more than financial ones, since the amount of money received is adjusted on an actuarial basis depending on your age. If you live to average life expectancy, you should receive the same amount of money irrespective of when you initiate Social Security payments . Considerations that I would include are:
1. How is your health? If your health is poor, it is to your benefit to take SS early. The converse applies if you have good health and a good family history.
2. Are you still working? Since SS benefits are clawed back if you earn too much money, it makes no sense to take before age 65.
3. Do you want to use the extra money to enjoy life before you get too old? Travel is more difficult as you age and you might make better use of the money when you are younger.
4. Do you feel confident that the government won’t change the SS rules? Although I doubt that your benefit would decrease in the future, I think that it is possible that 100% of SS benefits may become taxable. Remember, SS benefits were originally supposed to be tax free; but, this was changed in order to stabilize the program. If this occurs, you would avoid taxes by taking the benefit early.
5. Do you want to potentially protect you assets from health care debts leave more money to your children? You can gift money that you have personally to your heirs and if done with enough advance time, it would not be subject to a clawback in the event of nursing home debts or other debts. Early SS benefits may give you the opportunity to gift more money earlier.
6. Do you feel that “a bird in the hand is worth two in the bush”? I generally like having assets in my possession rather than a government promise to pay more in the future.
One last comment – the increase in SS benefits for persons born 1960 or later is not a linear 8% increase per year. If you retire at age 62, you would receive 70% of your PIA. At age 63, you would receive 75% of your PIA (a 7.1 % increase). At age 64, you would receive 80% of your PIA (a 6.7% increase); at age 65 you would receive 86 2/3% of your PIA (an 8.3% increase); at 66 you would receive 93 1/3% of PIA (7.9% increase); at 67 you would receive 100% of your PIA (a 7.0% increase).
John Tafuri, MD
One last consideration – if your spouse is still working, your SS benefits may be taxed at a higher rate if you take them early if you are filing jointly and your spouse has a high income. It may be worth waiting until your spouse retires as well so that the benefits will be taxed in a lower tax bracket.
I have never heard it clarified: if you work 30 years and retire at 62 and stop paying into SSI and claim it at FRA 67, does the MySocSec estimate for 67 work accurately? Or should one expect less because one did not actually pay in those last 5 years?
Yes! At age 62 it is accurate but not before. PIA is calculated at age 62 (which is called your year of first eligibility). It can only increase from there, never decrease. So even if you have 5 years of “zeros” reported (you worked 30/35 years used to calculate AIME), your FRA at 67 is accurate. This wouldn’t be the case if you retired at age 60 because your FRA assumes you are going to keep working. Clear as mud like most things with social security…
https://www.ssa.gov/oact/progdata/retirebenefit2.html
Although I agree with your analysis, I would add a word of caution. “Your SSA Statement” has the following statement:
“You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until
your full retirement age (67 years), your payment would be about………………………………………… $2,829 a month
age 70, your payment would be about………………………………………………………………………………………….. $3,660 a month
age 62, your payment would be about………………………………………………………………………………………….. $1,837 a month
The statement says that “if you continue working until your full retirement age your payment would be…”
If you get the statement at age 62 when you retire, the benefit quoted at age 67 will assume that you continue to work until age 67. If you had only 30 years credit at age 62, the quoted benefit will assume 35 years of income. Therefore, the quoted benefit in the statement will overstate the amount that you will actually receive if you stop working at age 62. If you have 35 or more years of work credit, the benefit may be overstated if your current salary is greater than your lowest 5 years of inflation adjusted salary over the prior 35 years.
Exactly. The SS statement doesn’t specify what you will have at 62 or 67 or 70 if you stop working today. The assumption that statement uses is that you work until the time you start taking benefits.
The impact from not working post 62 to your projected benefits depends on your earnings record and SS bend points. This can be calculated on the SS website and in some cases is very minor, maybe a few dollars difference. This needs to be explored on an individual basis.
In the scenario presented, the MD states that he was born after 1960, worked 30 years and was looking at a SS statement projecting benefits at age 67. Assuming that he is past the second PIA bendpoint and earns the SS maximum salary, each year he works increases in SS benefit by about $40/month or $480/year.
If he worked 35 years or more, the increase in SS by working longer will be less depending or what his 5 lowest inflation adjusted salaries were in those 35 years. The increase will be proportionate to the new salaries vs. the salaries that are being replaced.
My FRA per Social Security will be 67. I plan to take mine at 70.
My Dad insisted on taking his at 62 despite my adamant pleading.
He developed progressive Parkinsons and passed away at 76. So in retrospect, he made the right choice. Whether he sensed he wouldn’t live long or whether he didn’t understand it all I’m not sure.
Either way, he turned out to be right. Again.
Good analysis. As is common, this ignores those who will keep working to or past age 70. For that group of docs SS benefits taken before 70 will be taxed at high ordinary income rates. That can push combined federal and state tax rates to the mid 40’s or higher. The benefit of taking early is greatly reduced under these circumstances.
After retirement, for many, the income tax rate will decline, even with large RMD’s. This tilts more in favor of delaying for such people.
Of course, if declines in health suggest that retirement and death may come earlier than expected, one should repeat the analysis.
Yes, there is an assumption (probably valid most of the time no?) that no one is going to start taking SS before they stop working.
Part of the problem with this sort of calculation is that in the majority of cases (at least for those who follow the recommendation of WCI and confine themselves to only one spouse) you are talking about a couple reasonably close together in age who both have earnings histories, usually with the physician’s income hitting the max almost every year over their career (I wonder what happens to the folks like PoF who have shortened earnings histories – another blog post idea for him!). It seems pretty clear that, if possible, the higher-earning spouse should delay claiming Social Security until age 70 in order to max out the amount received, but what about the lower-earning spouse? Since the lower-earning spouse is going to get the spousal benefit amount (my understanding is that that is 50% of the higher-earning spouse’s benefit) at age 70, doesn’t it make sense for the lower-earning spouse to claim early and not leave all the benefits to be collected between age 62 and age 70 (when the spousal benefit kicks in) on the table?
PoF wrote that blog already. He has an earth shattering post on the “bend-points” that is better than anything else on the internet. https://www.physicianonfire.com/ssa2017/
Spousal claiming strategies are much more complex, but you are correct that the higher earning spouse should delay until 70 (to get longevity insurance for the longer lived of the couple). When the lower earning spouse should claim is a bit more complex, but you are correct they can switch to the spousal benefit when their spouse claims the higher/delayed benefit. You get max 1/2 of your spouses PIA if you claim at your FRA. It is less than 1/2 of the benefit if you OR your spouse claims early. https://www.ssa.gov/oact/quickcalc/spouse.html
I tried that site, but it still doesn’t clearly address the question.
My scenario (and it should be a very common one for followers of this site) is that I am 63 with many years of making the max SS limit contribution. My wife is 62 and spent most of her working years doing part-time work such that her PIA is somewhat less than half of mine. Presuming that I wait until age 70 to claim my benefits:
1) If my wife waits until I claim at age 70, she would be eligible for the spousal benefit which is 50% of my PIA. Would that be 50% of the benefit amount I would receive if I claimed at FRA or would it be 50% of the increased benefit amount I would receive for delaying until age 70?
2) Since she is age 62, my wife can claim SS benefits based on her own earnings record this year; obviously they would be reduced benefits as she has not reached FRA. Does her having claimed benefits early based on her own earnings record have any effect on the amount of the spousal benefit she would receive when I claim my benefit 7 years from now?
3) Regardless of the answer to #1 (since my wife’s PIA is well less than half of mine) and presuming the answer to #2 is “No”, then wouldn’t it be a silly waste if my wife didn’t claim her own benefit now and collect it for the next 7 years until she can switch to collecting her higher spousal benefit?
1. I think you’d benefit from reading Mike Piper’s Social Security book.
The 50% benefit she would get is what your benefit is when you file and suspend. But this is a pretty complex area. There’s a whole chapter or two on it in the book. It’s only $5. https://amzn.to/2RHXQrt
But the bottom line is that this is much more complicated when you’re married (or divorced) than when you’re single and the right answer is often for the lower earner to claim their own benefit for a while and then claim 50% of the higher earner’s benefit at 70.
2. No.
3. Yes.
WCI, file and suspend was eliminated by congress in 2015 and should be fully phased out soon.
PEVEND,
1. The spousal benefit max is 50% of the PIA at 67. It does not get delayed claiming credits.
2. YES, she gets less if she files early on her own record. This is because of the way spousal benefit is calculated. Say her PIA at 67 if 1000 but she claims early and gets 800. The maximal spousal benefit is 1200 (which is 50% of the worker’s PIA at age 67). SS calculates the spousal benefit by her PIA (1000) plus a “true up” of 200 to get to 1200. When she claims early, her PIA is then 800 plus a true up of 200, so she only gets 1000 when she switches to the spousal benefit. If the spouse claims early, her PIA is decreased by the early claiming and the true up only represents what it would have been had she claimed at FRA.
3. The best answer usually is to claim early on your own record and then switch to a spousal, but claiming early does reduce the spousal so you need to do the math.
PEVEND,
I forgot to mention that if she files for her own benefit, then you can file for a spousal benefit on her until you claim your own benefit and she takes a spousal on you. You claiming a spousal doesnt effect delayed income credits on your own record.
Because this is confusing, see if either of these help
http://www.helpwithmysocialsecurity.com/spousal-benefits/
http://www.helpwithmysocialsecurity.com/social-security-spousal-benefits-2/
Is that still true for people >The new laws also ended the ability to file a “restricted application” for spouse’s benefits. This >>strategy applied to workers who reached full retirement age, and whose spouse was already >>receiving worker benefits. This allowed workers to file only for their spousal benefit while delaying >>their own retirement benefits to age 70 in order to accrue delayed retirement credits and maximize >>benefits. This strategy was usually applied if the worker delaying retirement benefits would have a >>higher benefit based on their own work record. In other words, they could receive their spousal >>benefit while waiting for their own benefit to grow.
>>These options are no longer available for anyone who turned 66 after May 1, 2016.
I think I used the wrong term with file and suspend. It would be easier to keep it all straight if they’d quit changing it every few years!
I am planning to wait until 70 to claim my SS. But I wonder about several things.
Will the benefits be cut for the well off in the interim, so by the time I claim, my benefit will be less. If I were to claim earlier, I wonder if I might be grandfathered at current benefit amounts.
I am still working and in a very high combined federal/state marginal tax bracket of around 46%, so the after tax SS benefit would be just a rounding error. Given that scenario, as long as I continue working and earning a high income, I feel I should probably wait until 70. My spouse will plan to claim at her FRA of 67.
I think that’s an unrealistic concern that somehow someone will be better off for claiming early and those who are the same age but waited will be penalized. I think most would consider that patently unfair and so an adjustment would be made. If the benefits are cut, they would likely not be cut for those in their 60s anyway but those who are younger. More likely, the retirement age goes up a bit, the tax goes up a bit, it all becomes a little more taxable etc.
Mike Piper wrote a free social security calculator (google “opensocialsecurity”) that allows one to assume that social security will be reduced by a percentage (user input) after a certain year (also user input). The default is the current projection from the social security auditors showing the trust fund to be depleted in 2035 and with a payout of 75% of benefits (this may have changed since I last ran my numbers).
In my case, (with a 5 year younger spouse with fewer benefits) it is best for me to wait until age 70 to maximize my spouse’s survivor benefits in the regular case. In the “reduced benefits in 2035” case I should take social security 15 months earlier than age 70 to maximize our lifetime social security benefits.
The program also allows one to enter a manual claiming strategy if you want to explore alternate claiming ages in addition, whether or not you have chosen the regular or reduced social security main case. I hope this helps you answer your concerns in your situation.
I’m taking it early. Don’t care as I don’t want to die rich. Much rather spend the SS I gave the gov. than retirement accounts I want to leave for kids (even those I want to spend substantially). At 60+ its fair game where life takes us (we are doctors…we have seen cancer etc). Not being a pessimist, just a realist.
So what’s the big deal if you die early and don’t “get your money back that you paid”? It’s not like your hearse will have a trailer hitch. It’s a bit like complaining that your term life insurance didn’t pay out.
No big deal, it is just less stupid. Waiting till 70 and you die at 70 is stupider than claim at 62 and start spending.
Whats waiting in till 70 for? For a higher pay out? diminishing returns. I’ll take 2.2 K instead of 3.4K or whatever. Big whoop. Get that money early and spend it. Simple philosophy.
I disagree. I think you discount the longevity insurance benefit too much.
May be, but thats insurance benefit tail wag the age dog.
Risk is death vs 1K / SS check extra benefit? May be your message of live like a resident isn’t reaching everyone, because if it is then this is small price to pay to live a good retired life without delaying SS payments for small per check benefit.
I’m not sure why you think you would need to claim SS early to somehow live a good retired life. The debate here isn’t how much you can spend. It’s between two scenarios where you spend the same:
# 1 Take SS early and spend less from nest egg from 62 on vs
# 2 Take SS late and spend more from nest egg from 62 to 70
I am in support of “Notwhatitseems”. Give me my social security at 62. The reward for waiting by the Government is their way of banking on the fact that some people die off before then and so they don’t get paid. No matter what u say Dave, we are not immune to the “reaper” before we turn 70.
It’s your life and your money, but actuarially speaking, it doesn’t matter when you claim. On average, it works out the same.
I would argue that for this audience, actuarially speaking, it’s not neutral, but it’s advantageous to delaying. Not that I have the stats at my fingertips, but isn’t education a factor in increased life expectancy?
Here’s one article (Boston College) that looks at the actuarial statistics:
https://crr.bc.edu/wp-content/uploads/2019/11/IB_19-18.pdf
The popular (?) press article (based on this article) is at
https://www.marketwatch.com/story/how-far-off-are-the-actuarial-adjustments-of-social-security-benefits-2019-11-19
In brief
“For the average worker, the analysis shows that the reduction for claiming early is currently too large while the increase for claiming late is about right.
Higher earners – who live longer and claim later – get a really good deal under the current system.”
Also, remember if you have a spouse who may outlive you, you are playing with their future as well. I saw something that was fairly authoritative (can’t put my hands on it since I’m at work and it’s at home) that said that while it might be a crapshoot as to whether a single person makes it to the age where delaying claiming benefits is profitable, it is highly likely that delaying benefits for the higher earner of a couple will be profitable for at least one of them.
Agreed, but we are talking about small sums of money. Spouse will have her own SS + my life insurance proceeds. Plenty there. Point is you have delayed gratification and you are still delaying till 70? What are you doing. Get SS, spend and enjoy.
If it is truly small sums of money for you, it really doesn’t matter what you do with it.
Exactly. I agree.
Finally remembered to update this with the post I was referring to:
https://www.kitces.com/blog/why-it-rarely-pays-for-both-spouses-to-delay-social-security-benefits/
What is the recommended SS claiming strategy for couples with two high earners (two docs or similar)? Assume that both are close in age and accumulated benefit. I have yet to see a recommendation for this (my) scenario.
You’d have to run the numbers, but I wouldn’t be surprised if it made sense for both to delay.
Vagabond,
Likely at least one person will want to wait until 70 to keep a largest check for a survivor benefit/longevity insurance.
If they both claim at 62 vs 70: Cross over point is age 77 and by age 90 you have 748k more by waiting.
If they both claim at FRA vs 70: cross over point is age 80 and by age 90 you have 388k more by waiting.
If one claims at 62 and one at 70:
-vs both at 70: Cross over 78 and you make 362k more by waiting
Again, SS is actuarilly sound so if you live to the average age, you will get the same amount no matter when you claim.
Education and wealth are both risk factors for a long life. If there are risk factors for longevity present, you are likely best off to defer social security because it is the best longevity insurance around!
“Risk factors for longevity”! As if it’s a disease or something.
You want a risk factor for longevity? How about owning an annuity (or perhaps deferring SS payments as that is similar to buying an annuity?) Annuity owners live longer on average. Whether that’s so they can “stick it to the man” or simply selection bias, I’ll let you decide.
Husband claimed earlier on disability. I’ve got spousal benefits under his earnings. At age 70, will claim under my own earnings. We look at delayed claiming as more than longevity insurance. We look at it as inflation insurance.
Because Social Security benefits are Cost of Living adjusted, that source of income will become increasingly valuable if we hit a period of high inflation. Our pensions, on the other hand, are (for the most part) not Cost of Living adjusted.
So, we’re looking forward to a raise in a few years, when I turn 70!
This question becomes easy for docs who plan to work to 70 or older.
The income taxes on a high earned income + SS will reduce the benefit by a large factor. Maybe as much as 50%. Unless one is in poor health, it would not pay to give up the higher benefits from delaying in return for half the smaller amount taken early.
Most Social Security calculators I have seen, including the otherwise excellent one from Mike Piper, ignore taxes. In effect, they assume you get to keep every dollar you receive, or at least that your tax rates will be the same with or without taking SS and before and after retirement. This can get you to wildly inaccurate conclusions.
This makes a lot of sense. We will still be earning high income and paying very high income taxes. Waiting longer will perhaps allow a slightly lower marginal tax rate on the SS benefits, but not by much unless we move to a state with no income tax. Once you hit 70, the RMDs are a killer as far as trying to lower income taxes. Barring a major health issue in our 60s, the combination of passive income, earned income, and then RMDs will keep our marginal tax rates very high throughout our lives.
The issue AFAN raises is what I’ve been searching for in both Piper’s book and website calculator: The taxation effect when the high earner continues to work to 70.
To clarify my situation:
I am higher earning spouse at age 61 and wife is 58 (and has SS PIA at about 80% of mine).
I already have decided to work to age 70 with earnings at Fed and State marginal tax rate of 50%.
Therefore It is an easy decision for me to defer SS until I’m age 70. The puzzle is when should my wife get benefits (she will turn 67 when I am 70). If she obtains ANY benefits before I stop making high earned income, her benefits will be taxed at our high marginal rate. So, it seems foolish to have her take any benefits earlier than that. Yet, Piper’s calculator suggested she take her own SS benefits when she is 62. It really seems that the calculator wasn’t able to know that when she is 62 I will still be working.
For taxation reasons, it seems better for her to wait until at least age 67 to start her SS benefits (when I am 70 and cease working and start my own SS benefits and be at a lower marginal rate) . It may be even better for her to wait 3 more years to maximize her own SS benefits when she reaches 70.
Both of us are likely to reach 90+.
Appreciate any thoughts on my question about taxation considerations in our situation.
It is safe to assume that 85% of her SS will be dragged into taxable income no matter when she claims. Waiting until 67 will get her all of her delayed claiming credits, and then waiting until 70 will increase the amount 24% on top of her PIA. But by the time she is 70, you will be older than 72 and RMDs will very likely put you in a higher tax bracket yet again. The only time you might not be in a high tax bracket is when she is 68 and 69. If you both live a long time, both of you can claim at 70 and that will provide the most after-tax income.
Thanks so much, it looks like you understand my question.
For sure we are going to blow past the 85% taxable income by far, so that wasn’t really a concern. Our working plan is to have annual living expenses/income of $200 K once I retire at 70 (she will be 67).
My simplified table for my wife’s decision:
Age 62. PIA 1770. Marginal rate(MR) total 50%. After taxes(AT) $885
Age 63. PIA 1770. MR 50%. AT 885
…
Age 67. PIA 1770 MR 33% (I’m retired) AT $1168
If she delays SS to 67, our MR is at its lowest it will be at 33% as I’ve retired too:
Age 67. PIA 2680. MR 33%. AT $1769
If she delays to 70:
Age 70. PIA 3438. MR 33%. AT $2270
My conclusions:
1. It really seems foolish that Pipers calculator recommended her claiming at age 62 when 50% goes to taxes.
2. At least when she’s 67 we have settled to our lowest tax rate of 33%. But we don’t “need” her money if we’d like the increased funds at age 70 which she likely would enjoy for 20 years.
Do my thoughts make sense?
If I were you, I’d email Mike and ask his thoughts. He’ll either explain why you’re wrong or he’ll fix his calculator. Mike (at) obliviousinvestor.com.
Thank you for your suggestion. He concurred that his calculator does NOT take taxation into consideration. He agrees that as long as my work puts us in a higher tax bracket we should also defer SS for my wife.
Because of my greater desire for her to have longevity insurance, I think I will suggest she wait until she is 70 (rather than 67 when I plan on retirement).
Great suggestion.
If you will be in the SAME tax bracket while working and after retirement then you can ignore the tax implications and simply attempt to maximize the SS amounts paid. If you would be in a high tax bracket after retirement but different than while working, then tax effects remain relevant.
People often worry about the Medicare rates one would pay in retirement. They go up with income, so higher income means higher rates. But the total cost of Medicare and the difference between the highest and next highest rates will not be big factors for a couple in the top tax bracket. For such people the effect may be too small to attempt to optimize. It will depend on exactly the break points for Medicare rates, projected over your lifetime. Small errors in this prediction will give you the wrong answer. Getting it right will save you a few thousand dollars per year perhaps. Real money but not a significant amount for a couple in the top tax bracket.
Yes, hopefully the cost of Medicare premiums in retirement will be irrelevant for long term readers of this blog.
My next decision as age 65 approaches is Medicare vs Private Insurance. Obviously it is interesting to be on the other side of this question as opposed to just worrying about my payor mix.
I couldn’t find that you had done a blog on that decision. For example, I hear that Medicare may have annual or lifetime cap limits. I’m more worried about avoiding disaster scenarios, freedom to select my doctor, etc as opposed to premium differences.
If you have done something on this, could you refer me?
Thanks
You mean Medicare Part B or something? I see little reason not to get Part A.
We are both NY State retirees. We pay for ongoing healthcare insurance through that retirement system. That healthcare insurance becomes secondary once we get Medicare. At that juncture, Medicare becomes our primary insurance and our Medicare premiums are refunded to us, in our pension check.
If, due to high income, our Medicare premiums increase, we can submit documentation and get refunded the higher Medicare premiums we paid due to IRMAA.
So, that’s what’s what for the NYSLRS (if you have this, you know what it is).
If you are retired and you pay for healthcare insurance deducted from your pension and also have Medicare, you should check and see if they refund the higher Medicare premiums.
I am 62. My plan is to take SS at age 70.
However, I also view SS as bear market insurance. That is, if between my FRA (66) and age 70, an extended bear market hits stocks, I would pull the trigger to avoid using my stock holdings as an income source…in hopes of stock market recovery
Interesting strategy. It could provide a bit of a hedge there is the SS amount would be a significant part of your income. You could also just spend from your bonds/cash while awaiting a market recovery.
“I forgot to mention that if she files for her own benefit, then you can file for a spousal benefit on her until you claim your own benefit and she takes a spousal on you. You claiming a spousal doesn’t effect delayed income credits on your own record.”
I ran the Mike Piper Social Security calculator and this wasn’t mentioned. My wife is 4 years younger than I am and earned less over her working life. This strategy says essentially take wife’s benefit at 62. I take half her benefits as a spouse until I am age 70 to maximize delayed credits. Then reverse the spousal benefits.
Any downsides to this? Why wouldn’t I do this? Looks like free money.
That’s usually the case that you should claim the lower earning spouse’s benefit first and delay the higher earner’s benefits until 70. Doing that is like free money.
If I understand your strategy correctly, the government has closed that “free money” loophole. People born after 1954 no longer can claim spousal benefits while delaying their own, they are “deemed” to have filed for both. (see https://www.ssa.gov/planners/retire/deemedfaq.html) Open social security correctly applied this “old” strategy in my case (I was born before 1954) as my optimal case but apparently didn’t in your case (I assume you were born 1954 or later).
You can test the “opensocialsecurity” program by changing your birth year to one before 1954 to see if the program changes the optimum social security strategy.