An Interesting Strategy for Taking Your Social Security Benefits

We've had some debates here and been back and forth on when to take Social Security retirement benefits (for an overview of the discussion, see When to Take Social Security). There's not one "right" answer, of course, but we all seemed to agree that the "best" option was much more up for debate than most personal finance-related decisions. That is, until now.

Here's a piece from Forbes that recommends the "best" way for couples to answer the "when do I take Social Security" question. The recommendation:

One spouse (usually the wife) claims at 62 to 66, while the other waits until 69 or 70 to collect. This pays off because of obscure Social Security rules and some facts about life expectancy that aren't obvious if you don't make your living as an actuary.

And the reasons it supposedly works:

For the boomers turning 62 next year (and anyone born from 1943 through 1954) the Social Security "full retirement age" is 66. If they claim benefits at 62, they get just 75% of their full retirement age benefits. For each year they wait past 66, they get 8% more (plus an inflation adjustment), for a maximum benefit at 70 equal to 132% of the full retirement age payout.

These adjustments are supposed to be actuarially neutral--meaning if you live to the average age, you get about the same whether you start collecting smaller checks early or bigger checks later. But they're not. One reason is that married couples get a special deal: When one dies, the survivor can take the dead spouse's benefits (if they're higher) and drop his or her own.

"Whoever the higher earner is should plan to delay taking Social Security, because the higher benefit will always live on," says James Mahaney, vice president of Prudential Retirement and coauthor of one of the papers. "The key message is keep your husband in the workforce as long as you can,'' quips Alicia H. Munnell, director of the Center for Retirement Research at Boston College and coauthor of the other paper. (She notes that a wife might continue to work, too, while collecting Social Security. Although early retirees can lose a portion of their benefits if they earn too much, once you reach 66 you don't incur any penalty for working.)

The piece goes on to list more details and thoughts in support of this recommendation, but these are the highlights. I must say, this plan makes sense to me. Of course it only works for married couples and we still have the "is it better to wait" question for individuals, but this does seem to address the problem for a large segment of the population.

Any thoughts or comments on this strategy?

Comments

[Stephanie]

Well, at 23, retirement is still a ways away. And usually I don't get all up in arms about who earns more money...but I guess it bothered me that they say that the man earns more...maybe that was the case for the people reaching retirement age...but I'm not sure if it will continue to be true when I reach that age. Well, maybe that wont be an issue with all the "Social Security is going to run out soon!" theories...

[Edmund]

I'm in my 20s, and all the people who I know in the 20s don't seem to care much about the retirement, let alone saving up for it.

Anyway, I don't see where in the article that assumes the man is going to make more. I think the article assumes that men die before women.

I guess, as a man, I should be up in arms about that.

[Kevin]

I'm 32, I consider any money I would get from Social Security a bonus. I have serious doubts on whether it will be solvent in 30 years.

[Swim Upstream to Wealth]

Social Security will be solvent in 30 years; we will just get at least 25% less than we expect. The real scary mess is Medicare, but this is a post on social security so I won't go there.

The tough part about projecting when to take social security or what option to take for a pension/survivor benefit is you are betting on the future. You can look at family genes or your current health, but it is still a gamble.

If you don't need the money from Social Security then delay taking it. Every year delayed is an 8% return...guaranteed. Those are tough returns to get today, at least for a guaranteed return. But, I usually look at cash flow needs more than scheming how to maximize the benefit. The next factor is the tax situation. If you are working somewhere other than Wal-mart as a greeter, then you are probably making enough to warrant holding off on Social Security. Otherwise, you will end up paying tax on your Social Security. So rather than focusing on the benefit, I look at the other factor first.

[Nicole]

I'm confused. Why would one earner want to draw early? Wouldn't both just wait until as long as they can?

[Lord]

This approach does work for married couples but one problem may be a large age difference making it hard to achieve.

Actually, it is not an 8% return because taking it later doesn't extend your lifespan. For someone with average life expectancy it amounts to a real 4%, respectable and better than bonds but less than stocks. Taking it early and investing it can pay off.

[Zook]

Question...

If you are 66 and can take Social Security, but don' "need" it and can stay true to yourself, why not collect Social Security and invest 100% of the money?

Seriously. If you benefit is say $1000 a month after taxes and whatnot [lets just keep it simple], why not fill up a Roth IRA and invest wisely $12,000 a year?

From 66-67: $12K
67-68: $12K
68-69: $12K
69-70: $12K

Now $48K [more or less] at age 70 and then you start to incorportae the $12K into your wages.

How does this sound?

[Brandon Barkley]

You surely can invest the money, but I am not sure if social security income counts as earned income for the purposes of an IRA.