What would you guess your Social Security benefits are worth; a few hundred thousand, maybe?
Would it surprise you to know the average single person living twenty-five years could receive $500,000 or more in total Social Security benefits? Many married couples will receive over a million dollars.
According to the Social Security office, in 2018 the average monthly Social Security retirement benefit was $1,413. That’s $16,956 a year. If you were a high-wage earner, the maximum monthly benefit for someone who had reached Full Retirement Age (determined by your date of birth) was $2,788 – or $33,456 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. Starting in 1975, Social Security benefits are adjusted up each year with inflation, 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 in excess of 3.5%, although in recent years 2012 – 2016 increases have been less than 2% a year. If you take your $16,956 a year increasing at 2% a year for 25 years, you would receive $543,106 in total benefits. If you received $2,788 a month for 25 years, increasing at 2% a year, the total adds up to $1,071,606.
It’s a big pot of money. By making a wise decision, you can increase the size of the pot you draw from. Let’s take a look at the factors to consider when deciding when to start your Social Security.
This important decision has been examined by academics from numerous possible angles, 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 10 years or more), and Widow or Widowers.
Are you single with no prior marriages lasting 10 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 Full Retirement Age and how it interacts with the earnings limit.
First, let’s look at longevity.
For a single female, age 60, how likely do you think it is she’ll 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 only, the odds go up to 64%.
A male age 60 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 your health is strong 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 until a later age to begin benefits? 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 Full Retirement Age, if you earn too much, some of your benefits will be taken back. This 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.
FRA is determined by your date of birth. 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.
Note – the earnings limit is not a tax. If benefits are withheld, they are 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. Here’s how it works.
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 of the two) must reach their FRA about the same time – and when they do, they file a restricted application for spousal benefits only. Their own benefit remains on hold so when they reach age 70 they can switch over to it – and naturally, it will be a much 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 file for a spousal benefit. With an ex-spouse, as long as you have been divorced two years or more, your ex must have reached the age of eligibility (usually 62) but they did not have to file in order for you to be eligible for a spousal benefit.
You also MUST have reached your Full Retirement Age to use this restricted application approach, and it doesn’t work if you’re born 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.
Best to start with the odds that one or both of you 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 – which goes up to 65% for white-collar folks.
Here’s a short summary of who might use a particular strategy:
- If you want to get the most income from a scenario where you both live long, 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 long and the other passes around their mid 80’s or earlier, than typically the lowest earner starts benefits at their Full Retirement Age, and the highest 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 own retirement benefits.
This is a simplified summary. I am required to say it’s always best to get personalized advice. And, I agree, it is always better. This is an irrevocable 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 that did not remarry prior to age 60, and you worked as did your past partner, you have a unique claiming option that is not available to everyone.
Normally when you file for Social Security benefits you are deemed to be filing for all benefits you are eligible for (with the exception of those born on or before January 1, 1954, who use the restricted application). However, widows and widowers have a very special option – they can file a restricted application regardless of their date of birth and they do NOT have to wait until their Full Retirement Age to use this. This means they 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, could start her survivor benefit at age 60 (it would be a reduced benefit as she is starting early – but at least she is getting something), then at age 70 switch over to her own benefit amount. 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 Full Retirement Age.
We’ve now covered a few basic claiming options for Singles, Marrieds, and Widow/Widowers. I cover many more rules, along with examples, in my book Social Security Sense, on Amazon.
In addition, 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.
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