New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 20,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Lessons from the Open Social Security Calculator

Over the last several months, many people have written in about the various things they’ve learned from using the Open Social Security calculator. I thought it would be worthwhile to collect the most common such lessons in one place.

One thing that’s interesting to me is that these are all things that I (and other people) have been writing about for years. But for many people, being able to fiddle around with a calculator was what it took for the concepts to actually “click.”

As far as Social Security rules, there are a few things that frequently surprise people:

  • Restricted application strategies are still available for people born 1/1/1954 or earlier.
  • Your benefit as a spouse may be more or less than 50% of the amount your spouse is receiving.
  • It is possible (common, even) for a person to receive a retirement benefit and a spousal benefit at the same time.

As far as claiming strategies, the big takeaways depend on whether we’re talking about an unmarried person, the higher earner in a married couple, the lower earner in a married couple, or a divorcee. (For a widow/widower, there’s no need for a calculator, as the optimal strategy is fairly easy to determine.)

For an unmarried person, it’s usually advantageous to wait until somewhere in the 68-70 range. But this decision will be significantly impacted by the life expectancy selected as well as the discount rate used.

For the higher earner in a married couple, in the overwhelming majority of cases, it is wise to wait until 70 to file for retirement benefits. Doing so usually significantly increases the amount the couple can be expected to spend over their lifetimes. That said, there are some exceptions. For instance:

  • When the spouse with the lower primary insurance amount has a sizable government pension (such that the government pension offset would eliminate any Social Security survivor benefit they might otherwise receive), it becomes considerably less advantageous for the higher earner to wait.
  • When the lower earner is considerably older and has a much lower retirement benefit, it becomes less advantageous for the higher earner to wait (because the cost of waiting is much greater — because the lower earner can’t get his/her benefit as a spouse until the higher earner has filed for retirement benefits).
  • When child benefits are involved, it often pushes the ideal filing age earlier.*

For the lower earner in a married couple, there are a few lessons:

  • Waiting until 70 is usually not the best strategy.
  • However, the decision is not usually very impactful (e.g., claiming at 63 is not usually super different from claiming at 66).
  • The decision is more heavily affected by inputs such as life expectancies and discount rates (whereas the decision for the higher earner doesn’t usually fluctuate much).

For a divorcee who was married for 10+ years prior to divorce, if your ex-spouse has a higher earnings record, the decision is analogous to the decision for the lower earner in a married couple. That is, because you might have the option for a survivor benefit later, it’s often ideal to file for your own benefit early. To be clear though, while this is the strategy that usually maximizes expected spending, it’s somewhat high-risk, in that it’s essentially a bet on your ex-spouse dying somewhere around a “typical” age. If they live well beyond their life expectancy, you’ll be stuck collecting your reduced retirement benefit in the meantime.

For a divorcee with a higher earnings record than their ex-spouse, the decision is analogous to that for an unmarried person (i.e., it’s usually advantageous to wait, but not necessarily all the way until age 70).

*I’m still working on functionality for child benefits for married couples. Progress is slow (slower than I had anticipated, frankly) but steady.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

How Does the Social Security Family Maximum Work?

A reader writes in, asking:

“My wife and I have each been high earners throughout our careers. I recently read a Forbes article that mentioned a Social Security Family Maximum Benefit. I had never heard of such a thing before. If my wife and I each have high enough career earnings, would the Family Maximum be a reason for us to claim early? Or would it potentially kick in even if we do claim early, if our earnings are high enough?”

“No,” to both questions. The family maximum is not something that gets in the way of waiting to file for Social Security benefits. Nor is it something that gets in the way of two high earners having high benefits.

Rather, the family maximum is a rule that becomes relevant when there are at least two other people (i.e., a spouse as well as a minor child, adult disabled child, or dependent parent) who are drawing benefits on the work record of one person.

Specifically, the family maximum on a given person’s work record ranges from 150% to 187% of the person’s primary insurance amount. (Your primary insurance amount is your monthly retirement benefit if claimed at full retirement age.) For the family of a worker who turns 62 (or dies prior to age 62) in 2018, the family maximum on their work record would be calculated as:

  • 150% of their PIA up to $1,144, plus
  • 272% of their PIA from $1,144 to $1,651, plus
  • 134% of their PIA from $1,651 to $2,154, plus
  • 175% of their PIA over $2,154.

(You can find the relevant dollar amounts for previous years here.)

Example: Fred and Nancy have an adult disabled child, Sarah. Nancy’s work record is insufficient to qualify for a Social Security retirement benefit of her own, because she has spent so much of her time caring for Sarah. Fred’s PIA is such that the family maximum is calculated as 180% of his PIA.

Without considering the family maximum, Nancy would be able to receive a spousal benefit equal to 50% of Fred’s PIA (assuming she waits until her full retirement age to file for such benefit), and Sarah would be able to receive a child’s benefit equal to 50% of Fred’s PIA. However, because of the family maximum, Nancy and Sarah’s total benefit will be limited to 80% of Fred’s PIA (i.e., 180% of his PIA, minus the 100% that Fred gets himself).

How the Family Maximum Reduces Benefits

The family maximum rule will never reduce the benefit of a worker on his/her own work record. Rather, it will only reduce the amount that other people can receive on the worker’s work record. (And it reduces those other people’s benefits proportionately until the total amount the family is receiving on the worker’s record does not exceed the calculated maximum.)

Also, when calculating the amount of benefit that the rest of the family can receive, the worker’s own benefit is assumed to be 100% of their PIA, regardless of whether they actually filed before or after full retirement age. For example, if the family maximum calculated on your PIA is 170% of your PIA, that means that the maximum for the rest of your family (on your work record) would be 70% of your PIA, even if your own benefit is more or less than 100% of your PIA due to filing early or late.

Example (continued from above): The family maximum calculated based on Fred’s PIA is 180% of his PIA, which means that the rest of Fred’s family can receive 80% of his PIA. As a result, rather than each receiving a benefit equal to 50% of Fred’s PIA, Nancy and Sarah will each receive a benefit equal to 40% of Fred’s PIA.

What if Nancy did have enough work history to qualify for a retirement benefit of her own? In that case, her retirement benefit amount would not count toward the family max on Fred’s record.

Example: Nancy has a retirement benefit equal to 30% of Fred’s PIA. Before considering the family max, she should be able to also get a spousal benefit equal to 20% of Fred’s PIA (i.e., enough of a spousal benefit to bring her total benefit up to half of his PIA, just like normal). Now, with Nancy getting a spousal benefit equal to 20% of Fred’s PIA and Sarah getting a child’s benefit equal to 50% of Fred’s PIA, the family maximum of 180% of his PIA is not exceeded, so the family maximum rule has no effect at all.

Social Security Family Maximum and Ex-Spouses

A final important point about the family maximum is that an ex-spouse drawing a benefit on your work record does not count toward your family maximum benefit (i.e., the ex-spouse drawing a benefit will not reduce the benefit of anybody in your current family). And, in turn, the family maximum rule cannot reduce the benefit of an ex-spouse.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

How Long Will You Collect Social Security Survivor Benefits?

Today I just wanted to give you a quick heads-up about some updates to the Open Social Security calculator, as well as address a question many people have asked about it. I promise we’ll discuss something other than Social Security next time.

  • The calculator now reflects withholding (and eventual benefit adjustment) for the earnings test (i.e., for people receiving benefits and working while under full retirement age).
  • The default mortality table has been updated for the newly-released 2015 SSA period table. (It previously used the 2014 table, as that was the newest available until this month.)
  • The calculator now allows for the selection of a specific “I will die at” age rather than using a mortality table.
  • The calculator now allows for situations in which one of two spouses has already filed, in order to get a suggestion for the other spouse.
  • Now, when you load the page, the calculator automatically looks up the yield on 20-year TIPS to use as the default discount rate.

In the last two weeks, a common question about the calculator has been why it uses mortality tables (to calculate a probability of being alive in each given year) rather than simply assuming the user will die precisely at their life expectancy. The answer has to do with survivor benefits for married couples.

Specifically, assuming that each person will die at their expected date often results in an underestimation of the total amount of survivor benefits that are likely to be received — and that could cause the calculator to suggest a suboptimal strategy.

As one quick example, consider a husband and wife, each born 4/15/1960. The husband has PIA of $1,800, and the wife has PIA of $1,000. And let’s assume that they are in average health.

The calculator as it’s written now suggests that the husband files at 70 and the wife files at 62 and 3 months. The total present value of this strategy (i.e., the total amount of spending it can be expected to fund over their lifetimes) is $549,164, of which $102,742 comes from survivor benefits.

Now what if we instead do the analysis using fixed “death date” assumptions?

Well, if we look at the SSA 2015 period life table to find their life expectancies at age 62, we see that:

  • The husband has a life expectancy of age 82, and
  • The wife has a life expectancy of age 84.81.

If we used those as the fixed “death dates,” the calculator would be calculating for 2.81 years of survivor benefits.

If filing at 70 the husband has a retirement benefit of $2,232 per month. If filing at 62 and 3 months the wife has a retirement benefit of $712 per month. The difference between $2,232 and $712 is $1,520, which tells us that if the wife outlives the husband, she’ll get a survivor benefit of $1,520 per month — or $18,240 per year.

Multiply $18,240 by the “expected” 2.81 years, and we get a total survivor benefit of $51,254, before discounting for time value of money.

When we discount that back to age 62 with the 0.89% real rate the calculator is currently using, we get a PV of $42,399.

In other words, with this particular set of inputs, by assuming fixed dates of death, the calculator would only assign about 41% of the value ($42,399 rather than $102,742) to survivor benefits that it really should.

In some cases (depending on difference in ages, PIAs, etc) this might not matter much in terms of the suggested strategy. But in other cases it will be important. Accepting and accounting for uncertainty in death dates is, in general, useful.

Why Is There Such a Difference?

Even though each approach (year-by-year mortality, or fixed death date assumption) is using the same “expected” date at death, the year-by-year mortality approach accounts for scenarios in which there’s a long length of time where survivor benefits are relevant. For example, it accounts for a scenario in which the husband dies at 71 and the wife lives until 84. And a scenario in which the husband dies at 72 and the wife lives until 83. And a scenario in which the husband dies at 82 and the wife lives until 96, etc.

Each such scenario is unlikely, but when taken together they add up to a nontrivial probability. And in such scenarios, the payout for strategies that maximized survivor benefits is quite a bit higher than for strategies that did not do so. It would usually be a mistake not to take that into account.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

New Free, Open-Source Social Security Calculator

When deciding when to claim Social Security benefits, it can be helpful to use a calculator that runs the math for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and reports back, telling you which strategy is expected to provide the most total spendable dollars over your lifetime.

Maximize My Social Security and Social Security Solutions are the two best-known paid calculators in the field. For a few years though, there was a decent (basic) free option as well: “SSAnalyze,” hosted by an advisory firm called Bedrock Capital. Unfortunately, Bedrock Capital was bought by another financial firm late last year, and the buyer did not repost the calculator on their own site.

So, in April of this year I decided to make my own. It’s available now, and you can try it out it here:

https://opensocialsecurity.com/

I’m calling it “Open Social Security,” because I’m making it open-source, with three goals in mind:

  1. This way, anybody who is especially interested in the details can see for themselves how the calculator functions, rather than having to trust me or wonder about what assumptions I’m using.
  2. Possibly, somebody else will make use of the code in some other way — building some Social Security-related functionality into other financial planning software for instance.
  3. If something happens to me  — or I simply stop updating the calculator — somebody else can take the code and put it up on their own website so people will still have access to a useful tool.

I’ve been testing the heck out of it, but it’s certainly possible that there are still bugs. If you see something that doesn’t make sense or isn’t working, please let me know.

FYI, it runs much faster in Chrome or Firefox than it does in Safari. And Safari is in turn several times faster than Edge or Internet Explorer. In other words, if you’re using the calculator as a married person (i.e., a situation that requires your computer to do a lot of calculations), you might not want to use Internet Explorer or Edge, especially if you have an older computer.

Also, I would encourage you to please read the About page, as it has some basic information about how the calculator works, and it notes some important caveats.

Finally, for anybody who’s interested, here’s the GitHub page, where you can view/download the source code.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Claiming Social Security Early to Invest It: What Rate of Return (Discount Rate) Should We Assume?

A reader writes in, asking:

“In your social security talk at the White Coat Investor conference, you mentioned that when considering whether to delay social security or claim it early and invest it, the appropriate rate of return to assume is the rate of return from TIPS bonds. But I didn’t catch the reason for that. Would you consider discussing that for an article?”

As a bit of background for other readers: when deciding whether to delay Social Security or claim it now and invest the money, you have to make some assumption about the rate of return that you would earn on invested benefits. The higher the rate of return you assume, the more advantageous it is to claim benefits early.

Alternatively, you can think of the analysis as, “what part of my portfolio would I spend down in order to delay Social Security? And what would be the rate of return that I’d be giving up by no longer having those assets in my portfolio?”

In my view, the most appropriate rate of return to assume is that from Treasury Inflation-Protected Securities (TIPS), because:

  1. They are the investment with the most comparable level of risk to Social Security benefits, and
  2. TIPS or other low-risk holdings are often the part of the portfolio that should be spent down in order to delay Social Security.

For reference, at any given time you can find current TIPS yields here. (Right now, the yield on TIPS of comparable duration is just shy of 1%.)

Comparing Risk Level

TIPS and Social Security are both backed by the federal government, and they are both inflation-adjusted. Taken together, those two things mean that they have a very similar level of risk — more similar to each other than to most other things.

That said, the risk characteristics of Social Security and TIPS are not identical. With TIPS, the rate of return is as close to certain as you can get. In contrast, the rate of return that you get from delaying Social Security is uncertain, because you don’t know how long you will live.

However, that uncertainty is actually helpful for most people, because it precisely offsets a type of risk that you face.

By way of analogy, consider the purchase of term life insurance by a 30-year-old single mother with two young children. It’s uncertain whether the policy will pay out. And as such we cannot calculate a rate of return from her insurance purchase. But that uncertainty is good. We don’t know whether the policy will pay out, but we do know that it will pay out in exactly the scenario in which it is needed (i.e., if the mother dies).

The same thing goes for delaying Social Security (or buying any other lifetime annuity). We don’t know whether the decision will pay off, but we do know that it will pay off in a scenario in which you live a long time, which just so happens to be the financially scary retirement scenario. So the uncertainty here is actually reducing your overall financial risk level.

On the other hand, Social Security has a degree of political risk that TIPS do not have. As we’ve discussed before, that political risk doesn’t necessarily weigh in favor of claiming early. But there’s no question that that source of uncertainty is undesirable.

So, relative to the return from TIPS, the return from delaying Social Security (or, if you prefer to think of it this way, the return from selling some of your holdings in order to “buy more” Social Security) has one helpful source of uncertainty and one unhelpful source of uncertainty. Without any way to quantify the political risk, I generally consider TIPS and Social Security to have roughly similar overall risk levels — more similar to each other than to anything else.

Spending Down Bonds to “Buy More” Social Security

As financial planner Allan Roth has been arguing for years (here for example), it doesn’t usually make sense to own bonds earning a certain rate of interest while simultaneously paying a higher rate of interest on your mortgage. It’s generally advantageous to sell the bonds and pay down the mortgage.

A similar concept applies for Social Security.

For an unmarried male, the necessary rate of return that would make claiming Social Security at 62 as good as claiming at 70 is about 1.7% above inflation. For an unmarried female, the necessary return would be about 2.9% above inflation.* If delaying Social Security provides such an expected return, with a low level of risk, it doesn’t usually make sense to forgo additional Social Security in order to continue owning bonds that have a lower expected return (or a similar expected return and a higher level of risk).

*These rates of return use the SSA’s 2014 period life table for life expectancies. This understates the average life expectancy somewhat. As a result, the necessary rates of return would actually be somewhat higher. For a married couple, the “breakeven” rates of return will vary based on their difference in earnings history and difference in age. In general though, the breakeven rate of return for the higher earner will be significantly higher than for an unmarried person (meaning it’s usually super advantageous for this person to delay) and lower for the lower earner (meaning it’s less advantageous for this person to delay).

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

When Should I Take Social Security Benefits? (Single Investor)

The following is an excerpt from my book Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.

Even if you are married, the place to start when trying to figure out when to claim Social Security is with a solid understanding of the (less complicated) analysis for unmarried retirees.

And before we go any further, let’s make sure we’re on the same page about an important point: The decision of when to retire is separate from the decision of when to claim Social Security benefits. For example, depending on circumstances, you might find that it makes sense to retire at a given age, yet hold off on claiming Social Security until a later date — maybe even several years later.

The earlier you claim Social Security, the less you’ll receive per month. For example, the following table shows how retirement benefits are affected by the age at which you first claim them:

Age when you claim retirement benefits Amount of retirement benefit
5 years before FRA 70% of PIA
4 years before FRA 75% of PIA
3 years before FRA 80% of PIA
2 years before FRA 86.67% of PIA
1 year before FRA 93.33% of PIA
at FRA 100% of PIA
1 year after FRA 108% of PIA
2 years after FRA 116% of PIA
3 years after FRA 124% of PIA
4 years after FRA 132% of PIA

Background: Your “primary insurance amount” (PIA) is the amount you would receive per month if you claimed retirement benefits at your “full retirement age” (FRA).

In other words, by waiting until age 70 rather than claiming as early as possible at age 62, you can increase your monthly benefit amount by roughly three-quarters. Of course, by waiting, you decrease the number of months in which you’ll be receiving a Social Security check.

So how can you tell if the trade-off is worth it? One way to compare two possible ages for claiming benefits is to compute the age to which you would have to live for one strategy to become superior to the other strategy. Another way to analyze the decision is to compare the payout you get from delaying Social Security to the level of income you can safely get from other retirement income sources.

Computing the Breakeven Point

EXAMPLE: Alex and Bob are both retired and unmarried. Both are age 62, both have a full retirement age of 66 and 4 months, and both have exactly the same earnings history. In fact, the only difference between the two is that Alex claims his retirement benefit at age 62, while Bob waits all the way until 70. Even though Alex claims benefits at age 62, he doesn’t need to spend the money right now, so he keeps it in his savings account, where it earns a return that precisely matches inflation.

By age 70, because he has been receiving benefits for eight years, Alex is far better off than Bob. However, starting at age 70, Bob starts to catch up (because he’s receiving a monthly benefit equal to 129.3% of his primary insurance amount, as compared to Alex who is receiving a monthly benefit equal to 73.3% of his primary insurance amount).

In the end, Bob’s cumulative benefit surpasses Alex’s cumulative benefit approximately half way through age 80. From age 80.5 onward, Bob’s lead over Alex continues to grow.

The takeaway: For an unmarried retiree, from a breakeven perspective, if you live past age 80.5, you will have been better off claiming benefits at age 70 instead of claiming as early as possible at age 62.

According to the Social Security Administration, the average total life expectancy for a 62-year-old female is 84.9. For a male, it’s 82. In other words, from a breakeven perspective, most unmarried retirees will be best served by waiting to take their retirement benefit.

Comparing Social Security to Other Income Options

When you delay Social Security, you give up a certain amount of money right now (i.e., this month’s or this year’s benefits) in exchange for a stream of payments that will increase with inflation for the rest of your life.

Take, for example, somebody with a full retirement age of 66. If her benefit at full retirement age would be $1,000 per month, her benefit at age 62 would be $750 per month, and at age 63 it would be $800 per month.

Therefore, waiting from age 62 to age 63 is the equivalent of paying $9,000 (that is, $750 forgone per month, for 12 months) in exchange for a source of income that pays $600 per year (that is, a $50 increase in monthly retirement benefit, times 12 months per year), adjusted for inflation, for the rest of her life.

Dividing $600 by $9,000 shows us that delaying Social Security retirement benefits from age 62 to 63 provides a 6.67% payout. Let’s see how that compares to other sources of retirement income.

Inflation-adjusted single premium immediate lifetime annuities are essentially pensions that you can purchase from an insurance company. With such an annuity, you pay the insurance company an initial lump-sum (the premium for the policy), and they promise to pay you a certain amount of income, adjusted for inflation, for the rest of your life. In other words, such annuities are a source of income very similar to Social Security.

As of this writing, according to the website immediateannuities.com (which provides annuity quotes from multiple insurance companies), the highest payout available to a 63-year-old female on such an annuity is 4.02%. For a male, the highest available payout would be 4.33%. As you can see, both of these figures fall well short of the 6.67% payout that comes from delaying Social Security from 62 to 63.

Alternatively, we can compare the payout from delaying Social Security to the income that you can safely draw from a typical portfolio of stocks and bonds. Several studies have shown that, historically in the U.S., retirees trying to fund a 30-year retirement run a significant risk of running out of money when they use inflation-adjusted withdrawal rates greater than 4%. And it’s worth noting that even a 4% withdrawal rate isn’t a sure bet going forward, given that the studies show 4% to be mostly safe in the past, which is a far cry from completely safe in the future.

In other words, for each dollar of Social Security you give up now (by delaying benefits), you can expect to receive a greater level of income in the future than you could safely take from a dollar invested in a typical stock/bond portfolio.

A similar analysis can be performed for each year up to age 70, and the conclusion is the same: Delaying Social Security benefits can be an excellent way to increase the amount of income you can safely take from your portfolio.

EXAMPLE: Daniel is retired at 62 years old. His full retirement age is 66 and 4 months. He has $45,000 of annual expenses and a $600,000 portfolio. He is trying to decide between claiming benefits as early as possible at age 62 or spending down his portfolio while he holds off on claiming benefits until age 70.

Daniel’s primary insurance amount (the amount he’d receive per month if he claimed his retirement benefit at full retirement age) is $2,250, which means he would receive:

  • $1,650 per month ($19,800 per year) if he claimed benefits at age 62, or
  • $2,910 per month ($34,920 per year) if he claimed benefits at age 70.

If Daniel claims his retirement benefit at age 62, he’ll have to satisfy $25,200 of expenses every year from his portfolio (because Social Security will only be satisfying $19,800 out of $45,000). That is, he’ll be using a 4.2% withdrawal rate ($25,200 divided by his $600,000 portfolio) starting at age 62. That’s a somewhat higher withdrawal rate than most experts would recommend.

Alternatively, if Daniel delays Social Security until 70, he’ll have to satisfy annual expenses of $10,080 (that is, $45,000, minus $34,920 in Social Security benefits), plus an additional $34,920 for the eight years until he claims Social Security.

If Daniel allocates $279,360 (that is, $34,920 x 8) of his $600,000 portfolio to cash or something else very low-risk (in order to satisfy the additional expenses for those eight years), that leaves him with a typical stock/bond portfolio of $320,640. With a portfolio of $320,640, Daniel can satisfy his remaining $10,080 of annual expenses using a withdrawal rate of just 3.14%.

In effect, Daniel is spending down a portion of his portfolio in order to purchase additional Social Security benefits in the amount of $15,120 per year, starting at age 70. By doing so, he’s reduced the withdrawal rate that he’ll need to use from his portfolio for the remainder of his life, thereby reducing the probability that he’ll run out of money. In addition, if Daniel’s portfolio performs very poorly and he does run out of money, he’ll be much better off in the wait-until-70 scenario than in the claim-at-62 scenario, because he’ll be left with $34,920 of Social Security per year rather than $19,800.

Reasons Not to Delay Social Security

Of course, there are circumstances in which it would not make sense for an unmarried person to delay taking Social Security.

First and most obviously, if your finances are such that you absolutely need the income right now, then you have little choice in the matter.

Second, if you have reason to think that your life expectancy is well below average, it may be advantageous to claim benefits early. For example, if you have a medical condition such that you don’t expect to make it past age 64, it would obviously not make a great deal of sense to choose to wait until age 70 to claim benefits.

Third, the higher market interest rates are, the less attractive it is to delay Social Security. For example, if inflation-adjusted interest rates (such as those on inflation-protected Treasury bonds known as TIPS) were 2-3% higher than they are as of this writing, the payout from inflation-adjusted lifetime annuities might be higher than the payout from delaying Social Security.

Simple Summary

  • For unmarried retirees, from a breakeven perspective, you’ll be best served by waiting until age 70 to claim benefits if you expect to live past age 80.5. (And, for reference, the average total life expectancy for a 62-year-old female is 84.9. For a male, it’s 82.)
  • For unmarried retirees, on a dollar-for-dollar basis, the lifetime income you gain from delaying Social Security is generally greater than the level of income you can safely get from other sources. As a result, delaying Social Security can be a great way to increase the amount you can safely spend per year. (Or, said differently, it can be a great way to reduce the likelihood that you will outlive your money.)
  • The shorter your life expectancy and the greater the available yield on inflation-protected bonds, the less desirable it is to delay claiming Social Security benefits.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2018 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator (beta): Open Social Security