When should you start Social Security?

Paul Hamilton | More Than Money | Posted: Friday, February 19, 2016 8:01 pm

Hey Paul,

When should we begin our Social Security benefits? We are a middle-income couple with about $300K in our 401(k) and IRA. We are in reasonably good health, own our home and don’t anticipate any major changes in lifestyle as we enter our retirement years.

Jack and Diane

The timing of Social Security benefits may very well be the most important financial decision you’ll make as you enter retirement. In particular, as a middle-income couple you will have the full slate of potential start ages available. In contrast, the couple that enters retirement with meager savings has no choice but to start Social Security benefits as soon as possible. Alternatively, the wealthy couple can likely opt for the longevity strategy typically involving the high-earner waiting until 70 to start benefits while the lower earner starts spousal benefits at age 66.

The spousal age difference, relative earnings and several other characteristics will matter in making the Social Security decision. I will assume that the Jack is a couple years older than Diane and that he was the sole breadwinner — a situation that is quickly evaporating in America. A typical Social Security benefit for someone who made, in today’s dollars, annual incomes in the $40K’s would be about $1,500 a month — $18,000 annually. All future benefit amounts will maintain their buying power with annual cost-of-living-adjustments.

A quick overview of your benefit options is as follows:

• As all benefits will be based on Jack’s earnings you can start your benefit as early as age 62 and take a 25 percent hit, or wait until age 70 and enjoy a 32 percent permanent bonus on your benefit.

• Diane will only have a spousal benefit which is half of Jack’s age 66 benefit — $9,000. This is reduced if she starts the spousal benefits early with an age 62 reduction of 30 percent.

Three potential strategies

The Early Money Grab Strategy. Jack starts his own benefit at age 62 with a 25 percent permanent reduction, bringing his benefits to $13,500. Diane also starts benefits at age 62 and her spousal benefit, which would have been $9,000 at age 66 but is reduced to 70 percent of the full amount by taking it four years early, is down to $5,600. The total benefit is $19,100 for the two of you. If Diane predeceases Jack then he will just keep his $13,500 own benefit. If Jack predeceases Diane then her widow benefit will be 82.5 percent of his full retirement age benefit — $14,850.

The Patience Wins the Game Strategy. This may be an unrealistic plan in that you may exhaust your entire life savings before Social Security kicks in. The attractiveness of this strategy is that it provides the largest lifetime benefits if you both or even just Diane lives into her 90s. The key steps are that Jack, as the high-earner and older spouse, will wait until age 70 to start his own benefits. This will increase his benefits by 32 percent to $23,760. What you’ve done is locked in the maximum, not only for yourself while alive, but also for your wife. Diane’s key step is to wait to age 66, when she can start her full spousal benefit of $9,000. The spousal benefit doesn’t get any larger after full retirement age so no use in delaying it any further.

The Avoid Extremes (a.k.a. Smart) Strategy. Let me suggest that you think about a compromise solution that combines some early cash flows with the longevity insurance of waiting. If Jack waits until age 66, he’ll get the full benefit of $18,000. Diane can start her full spousal benefit of $9,000 at age 66. So, combined you’ll have $27,000 from social security. When one of you passes, the surviving spouse still receives $18,000 for life.

Social Security and retirement savings

You can reasonably withdraw $8,500 annually from $150K of retirement funds and expect it to last until age 90. Combining this with Social Security benefits brings gross income up to $35,500 — not much lower then your working days earnings. I’d call that a comfortable retirement!

Social Security benefits won’t be taxed as long as your taxable withdrawals from your 401(k) and IRA are not more than $18,500 annually. As a couple, you’ll need to fully finance the first four years out of your retirement savings — this could burn through half of your $300K. But $150K in retirement savings with no debt and $27K of untaxed Social Security perpetuates a middle-income lifestyle for many retirement years.

I have only discussed one specific case here. In practice everyone has a unique life story with various marital histories, earning levels and accumulation of retirement assets. As a service to the readers of this column I have provided a free social security planning page on my website, USA-Economics.com. This planning app will allow you to better understand your own Social Security benefits similar to what I have described for Jack and Diane. No one should have to make the biggest retirement decision on his or her own.