Americans who are near or in retirement are faced with the vexing question of when to take Social Security benefits. For a married couple, the complexity is multiplied by consideration of spousal benefits and the potential implementation of a "file-and-suspend" strategy. In this article, we will cover only some basic points.
Social Security retirement benefits are essentially an annuity that is indexed to inflation (the Consumer Price Index). For a single person deciding when to take retirement benefits, the important thing to understand is that Uncle Sam does not care when they are taken. His actuaries have calculated the benefits so that someone with an average life expectancy will collect the same present value of benefits regardless of when the benefits begin. The key question is how does the life expectancy of the claimant compare to the national average on a unisex basis. The unisex consideration is especially important for women because they tend to live longer than men, so an annuity is more valuable to them. Furthermore, a male in good health could also assign a higher value to deferring the Social Security payments. For example, according to the Social Security Website, a 65-year-old male is currently expected to live another 18 years to age 83. A male who is in excellent health and does not smoke or drink to excess, and is thus expected to live to age 90 or beyond, would be wise to consider delaying benefits to age 70. Likewise, an overweight diabetic smoker should begin taking benefits as soon as possible.
The important inputs to determining when to take Social Security benefits, aside from earnings history and projected future earnings, are as follows:
1) Maximum reasonable age at death--The higher this is, the more likely that delaying benefits will be the superior option.
2) Expected earned rate of return on investments--This is used as a discount rate (after deducting inflation) to determine the value of future benefit payments, so a higher value makes it less likely that delaying benefits will be recommended.
3) Expected rate of inflation--This is subtracted from the expected earned rate of return on investments to produce the real rate of return. A higher value makes it more likely that delaying benefits will be recommended.
Once we start considering the Social Security possibilities for a married couple, the complexity quickly becomes overwhelming. Professor Laurence Kotlikoff, one of America's foremost authorities on Social Security, wrote a column in Forbes, which discusses the absolutely hideous equation that determines the benefits of one of the spouses. It is truly something that could only have been designed by a government bureaucracy running amok. Kotlikoff asks the rhetorical question of whether it makes sense for our basic saving system (Social Security) to be so complicated that not one in a million Americans is able to correctly decipher it. As for me, I will happily admit to being in that million, math degree not withstanding.
A Website that is very helpful in deciding when to take benefits is maximizemysocialsecurity.com, which was actually designed by Professor Kotlikoff. IFA has purchased an advisor license to use this Website for our clients. If you are an IFA client, your IFA wealth advisor, working with IFA's in-house expert on this Website, can assist you in getting a report. You will need your personalized Social Security report that is generated at the Social Security Website, and if you are married, you will need the one for your spouse as well. If you are interested in learning more about IFA or becoming an IFA client, please give us a call at 888-643-3133.
About the Authors
Mark Hebner and additional IFA employees contributed to this article
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.