Social Security Decision Framework: When Should You Claim Social Security?

A reader writes in, asking:

“Do you think that the decision of when to claim Social Security can be simplified down into some sort of decision tree? (Spouse or not? Difference in ages? PIA for each? etc.)”

Unfortunately, a decision tree would be pretty unwieldy because it would have to explicitly incorporate all the various factors that could be relevant (e.g., disability benefits that you mentioned, or a government pension, or a dependent child, or an ex-spouse).

But, I do have a basic framework that I work from.

Step 1: Determine which sets of rules apply to each spouse.

That is, are either or both spouses affected by the new rules regarding restricted applications? Are they affected by the new rules regarding voluntary suspension?

Step 2: Ignoring, for the moment, coordination of spousal benefits (or dependent child/parent benefits, if applicable) is there any particularly strong preference for the spouse with the higher primary insurance amount to start retirement benefits at a given age?

In most cases, the answer to this question is, “yes, there is a strong preference for age 70.” As we’ve discussed before, when this spouse delays benefits, it increases the amount that the couple receives per month as long as either spouse is still alive, so it is usually very advantageous for this spouse to wait as long as possible.

In some cases, however, the answer might be that there is no strong preference — or even possibly a slight preference for claiming early (e.g., because both spouses are in poor health or because the high-PIA spouse is in poor health and the low-PIA spouse has a government pension that would eliminate any widow(er) benefits via the government pension offset).

Step 3: Ignoring, for the moment, coordination of spousal/child/parent benefits, is there any particularly strong preference for the low-PIA spouse to start retirement benefits at a given age?

The answer to this question varies significantly from case to case. It’s often the case that this spouse wants to start ASAP at 62 because:

• The couple needs the cash flow or
• One of the two spouses is in poor health.

On the other hand, sometimes they’re both in great health with family histories of longevity, and they don’t need the immediate cash flow, so there is a preference for waiting until 70.

And in many cases (especially when both spouses are in approximately average health), there is no strong preference. That is, the decision for the low-PIA spouse (again, ignoring spousal/child/parent benefits) is approximately “actuarially neutral” — meaning that, on average, claiming at any particular age works out approximately as well as claiming at any other particular age.

Step 4: Incorporate spousal/child/parent benefits into the analysis.

Here we’re looking at the rough-draft plan we’ve developed in steps 2 and 3 to see whether it needs adjustment.

First, we check to see the extent to which the rough plan allows for “free” spousal benefits for one spouse or the other via a restricted application. If there is a different strategy that allows for a greater amount of “free” spousal benefits, it often makes sense to adjust the plans somewhat.

For example, in step 3 we may have decided that we’re indifferent to when the low-PIA spouse files for benefits. What we often find in this step is that it makes sense for the low-PIA spouse to claim somewhat early, if doing so allows the high-PIA spouse to receive spousal benefits while he/she delays his/her own retirement benefit until age 70.

Second, we check whether the rough-draft plan gets in the way of desired child/parent benefit goals. For example, if the rough-draft plan is for both spouses to wait until 70, but that would mean a dependent child missing out on 8 years of benefits, we likely want to adjust our plan so that at least one spouse files earlier, in order to allow the child to begin receiving child’s benefits.

Step 4 here is where a decision tree would get particularly messy, I imagine.