Thinking about Social Security

Published On: September 27, 2016

Written by: Ben Atwater and Matt Malick

Even for the mass affluent, Social Security is a major part of retirement planning.  Say a married couple receives a total monthly benefit of $3,000, which equates to $36,000 per year.  Using a 4% annual withdrawal rate, this couple would need an additional $900,000 in investments to replace their Social Security benefits.

With this simple illustration, you can see just how important Social Security planning is.  Our general rule of thumb for when to claim benefits is that if you don’t urgently need your Social Security, it is best (especially for the higher earning spouse) to wait and claim benefits at age 70.  It is vital, though, to recognize that everyone’s unique situation requires advisors to undertake a specific analysis.  For example, individuals in poor health or with limited financial resources might be well-served by claiming early benefits.

People who claim benefits before full retirement age (FRA) – for folks born between 1943 and 1954, FRA is 66 – receive 6.67% less per month for each year they take Social Security before reaching FRA.  Roughly speaking, by taking Social Security at 62, your benefit will be 25% less than if you had waited until 66.  Conversely, for each year you wait after 66, until age 70, when Social Security benefits peak, your benefit grows by 8% annually plus cost-of-living adjustments (COLAs).

Social Security is a joint and survivor annuity.  After the death of a spouse, the surviving spouse will collect the higher of the two benefits.  The higher earning spouse will often want to delay their Social Security until age 70 to maximize benefits.  If one of the two spouses lives beyond the break-even age (about 82.5), the strategy of the highest earning person delaying benefits until 70 is a winner.  At age 65, more than 50% of women can expect to live past age 88, while 50% of men will live past 85.  This strategy is particularly beneficial for women due to their longer average lifespans; 66% of all Social Security beneficiaries age 85 and older are women.  If affordable, delaying benefits offers great insurance for the surviving spouse who has maximized a guaranteed, COLA-adjusted, tax advantaged benefit that they cannot outlive.

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