The Social Security Administration gives us a lot of leeway when it comes to choosing a date when we want to start receiving retirement benefits. There’s basically an eight-year window, beginning at age 62 and ending at 70 with corresponding monthly benefit reductions and increases based on full retirement age. Full retirement age is currently 66 to 67 depending upon year of birth.
In 2012, about 38% of men and 43% of women who began receiving retirement benefits chose to do so at 62—despite the fact that benefits are reduced by about 30% when you start receiving them at that age. Although financial need often triggers an age 62 start date, this isn’t always the case.
The decision regarding when to begin receiving Social Security retirement benefits should be carefully analyzed, especially if you’re married. It will affect the monthly benefit you and your spouse will receive for the rest of your lives. Your decision is irrevocable unless you change your mind within the first 12 months after you become eligible for retirement benefits and you repay all the benefits you’ve received.
Many people justify age 62 by saying that they will collect their benefits for a longer period than if they wait until their full retirement age or later. While this is true, the individual and total benefits received by couples may be much greater in situations where there’s a large disparity between benefit amounts, the primary earner begins receiving his or her benefits at full retirement age, and the non-primary earner lives several years longer than the primary earner.
To understand how this might work, let’s look at an illustration with the following five assumptions for a married couple, Harry and Sally:
- Harry is two years older than Sally.
- Harry and Sally’s full retirement age is 67.
- Harry and Sally’s respective full retirement age monthly benefits are $3,000 and $1,000.
- Harry dies at age 80 and Sally at 88.
- Annual cost of living adjustments (COLAs) are 2%.
Projected monthly benefit
Assuming that Harry applies for his retirement benefit at age 62, he will receive a projected monthly payment of approximately 70% of $3,000, or $2,100. Assuming that Sally waits until age 67, she will receive the greater of her benefit or a spousal benefit equal to 50% of Harry’s reduced age 67 benefit. Since Sally’s spousal benefit is higher, she’s projected to receive 50% of approximately $2,300 increased by COLAs, or $1,200.
If, on the other hand, Harry waits until age 67 to begin receiving his benefit, it’s projected to be approximately $3,300 (again, thanks to COLAs), or $1,200 greater than his age 62 benefit of $2,100. Likewise, Sally’s spousal benefit is projected to be approximately $1,700, or $500 greater than her projected monthly benefit of $1,200 assuming Harry begins his benefit at 62.
Projected annual results
Per Harry and Sally’s Projected Social Security Benefits spreadsheet, by waiting until age 67 to begin collecting their benefits:
- Harry and Sally’s annual benefits are projected to total approximately $62,000 in the first year that Sally is eligible to receive her spousal benefit, or $19,000 more than their total benefits of $43,000 if Harry begins receiving his benefits at age 62. This difference is projected to increase each year with future COLAs.
- It’s projected to take only 12 years, from Harry’s age 62 until his age 74, when the couple’s projected cumulative benefits of approximately $472,000 assuming an age 67 start date exceed their projected cumulative benefits of approximately $461,000 assuming an age 62 start date.
- The cumulative benefits over Harry and Sally’s lifetime assuming an age 67 start date are projected to total approximately $1,486,000, or $314,000 more than the age 62 start date amount of approximately $1,172,000.
Projected effect of high earner’s start date on spouse’s survivor benefit
As a surviving spouse, Sally is entitled to receive Harry’s monthly benefit at the time of his death. She’s projected to receive a much larger monthly benefit after Harry dies if he waits until age 67 to begin collecting his retirement benefit than if he starts his benefit at age 62. Per the spreadsheet:
- Sally’s annual survivor benefit is projected to be approximately $52,000 at her age 79, assuming an age 67 start date, or $15,000 greater than the approximately $37,000 that she’s projected to receive if Harry begins receiving benefits at age 62. Once again, the difference will increase each year with future COLAs.
- Approximately $172,000, or 55%, of Harry and Sally’s projected additional cumulative benefits of $314,000 attributable to delaying Harry’s start date by five years is projected to be received by Sally in the final 10 years of her life.
The Social Security start date decision is never easy, especially for couples. Given women’s longer life expectancy and the fact that they’re generally younger than their husbands, women will often continue to receive benefits for several years after their husbands have passed. Assuming that financial need doesn’t dictate an age 62 start date, and assuming both individuals are in good health, it’s generally advisable for couples to delay their start date until full retirement age or later, especially when there’s a sizable disparity between each individual’s potential benefit.
For a related analysis, read Social Security loophole’s huge windfall opportunity.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.