Close

    When Should You Start Your Social Security Benefits?

    by William Reichenstein

    When Should You Start Your Social Security Benefits? Splash image

    An individual can begin receiving Social Security benefits as early as age 62 or as late as age 70. The later someone starts, the higher the level of benefits.

    Most individuals apply for Social Security benefits before attaining Full Retirement Age, which is age 65 for people born before 1938.

    Some people begin benefits as soon as they retire because they do not have sufficient income from sources other than Social Security (such as IRA and 401(k) distributions) to support their lifestyle. However, many people can choose to delay the beginning of benefits. For these individuals, the question is: Is it worth the delay in receiving benefits to receive a higher monthly payment?

    This article presents strategies to maximize the present value of expected benefits and identifies factors that should influence this decision. The analysis for singles is relatively simple, while for married couples it becomes more complex. But before we get to that, let's review some key terms.

    Social Security Benefits

    Almost all Americans are entitled to Social Security benefits. In general, benefit payments may begin as early as age 62 or as late as age 70. The later one starts, the larger the monthly benefit payment.

    Once benefits begin, payments are adjusted annually with consumer prices. This cost of living adjustment is designed to ensure that benefit payments keep pace with inflation.

    The level of benefits at Full Retirement Age (FRA) is called the Primary Insurance Amount (PIA) and is based on detailed calculations. The Social Security Administration begins by calculating someone's Average Indexed Monthly Earnings for the 35 years of highest earnings, where earnings for years before age 60 are indexed to reflect wage inflation. The maximum income for any year is equal to that year's maximum income subject to Social Security taxes. Social Security then converts these indexed earnings into a monthly benefits level, or PIA, if benefits begin at the individual's Full Retirement Age. If benefits begin before reaching Full Retirement Age, actual monthly benefits will be smaller, and if benefits begin after attaining Full Retirement Age, actual monthly benefits will be larger.

    Table 1 presents Full Retirement Ages, as well as the adjustments to benefit levels for someone who begins receiving benefits based on his or her earnings record before and after Full Retirement Age. [For more details, see the Portfolio Strategies article “Planning for Retirement: What to Expect From Social Security” in the February 2002 AAII Journal, available at www.aaii.com.]

    For Singles: It's A Wash

    The Social Security system is close to actuarially fair for single individuals with average life expectancies. To be more precise, assuming life expectancy is average and the earnings test (which is discussed later) does not apply, the present value of expected benefit payments is approximately the same whether benefits begin at age 62, 63, 64.5, or any age through 70. No one should postpone the beginning of benefits beyond age 70 since there is no reward for such a delay. (For simplicity, we assume benefits begin on a full year—e.g., 62, 63, etc.)

    Table 2 presents the pattern of present values at age 62 of expected before-tax benefits for single males and females with average life expectancies, and Full Retirement Ages of 66 and 67. Although not shown, the pattern of present values for single individuals born before 1943 is similar to the pattern for people with Full Retirement Ages of 66.

    Table 2 presents estimates of benefits under two scenarios: first, if PIA remains constant, and second, if PIA increases by 1% per year. PIA would remain constant if the individual quit the work force but hasn't yet begun benefits, or if he continues working after age 62 but the pay is too low to raise PIA.

    The figures in the table represent the relative present value of maximum projected benefits. For a single female who will reach Full Retirement Age at 66 and whose PIA will remain constant, the present value relative of 100% at age 67 indicates that the present value of her projected benefits reaches a maximum if she begins benefits at that age. If she begins benefits at age 62, the present value of projected benefits would be 97.1% of the maximum.

    For single women, the present value of benefits is within 2.9% of the maximum if benefits start at any other age. In short, the benefit schedule is close to actuarially fair for a single female. For single males with a full retirement age of 66 and constant PIA, the present value of benefits reaches a maximum when benefits begin at age 64 or 65. The value of his benefits is 6.2% lower when benefits start at age 70. Due to his shorter life expectancy, there is a weak incentive for the average male to begin benefits at an earlier age than the average female.

    However, the picture changes for single males if the PIA increases. Based on this assumption, the value of his benefits reaches a maximum when started at ages 67 and 68.

    In short, depending upon whether we assume PIA remains constant or increases slowly, the present value of a single male's benefits is approximately the same no matter when benefits actually begin.

    In summary, assuming life expectancies are average and benefits are not reduced by the earnings test, the benefits schedule is actuarially fair for single males and females. Therefore, these two assumptions are key factors that should influence when a single person begins receiving Social Security benefits.

    Factors Affecting Singles

    This section discusses factors that influence when a single male or female should begin receiving benefits. The two most important factors are:

    • The applicability of the earnings test, and
    • The expected length of the individual's life.
    The earnings test applies to individuals who begin receiving payments before reaching Full Retirement Age. In years before reaching Full Retirement Age, Social Security benefits are reduced by $1 for every $2 of earned income above $11,280 (in 2002). Earned income includes salary and wages, but it does not include capital gains, dividends, interest, or withdrawals from retirement accounts. In the year someone reaches Full Retirement Age, benefits may be reduced by $1 for every $3 of earned income above $30,000 (in 2002). After reaching Full Retirement Age, individuals can receive full benefits with no limit on earnings. [See the February 2002 Portfolio Strategies article for additional details.]

    The earnings test limits or eliminates Social Security benefits for moderate- and high-income individuals. For example, suppose Judy applies for $1,200 per month in benefits at age 62, but she earns $35,000 in 2002. In the absence of the earnings test, her annual benefits would be $14,400. After this test, they are $2,540 or [$14,400 – (0.5 × ($35,000 – $11,280))]. Consequently, working singles who earn more than the earned income limit ($11,280 in 2002) should seldom begin benefits before attaining Full Retirement Age. An exception would be a single individual with a short life expectancy and with no dependents, such as a child, who will receive survivor's benefits.

    The second key factor is life expectancy. In general, the longer the life expectancy, the stronger the incentive to delay the start of benefits. Table 3 illustrates this idea. Norm is a 62-year-old single male with an average life expectancy of about 20 years. His Full Retirement Age is 66. He quits work today and considers three strategies:

    • If he begins benefits today, he will receive $900 per month, 75% of his $1,200 PIA;
    • If he postpones the beginning of benefits to age 66, he will receive $1,200 (in today's dollars);
    • If he postpones the beginning of benefits to age 67, he will receive $1,296 (in today's dollars).
    Strategies A, B, and C in Table 3 present the payments if he lives 20 years and starts benefits today, at age 66, and at age 67, respectively. The present values of the three income streams are almost identical. It follows that, if his life expectancy is much shorter than 20 years (and he is not affected by the earnings test), he should begin benefits today. If his life expectancy is much longer than 20 years, he should start benefits later.

    While the earnings test and life expectancy are the most important factors affecting the decision of when to start Social Security, other decidedly weaker factors are the person's sex and levels of interest rates. Due to their shorter life expectancies, single men have a weak incentive to begin receiving payments earlier than single women. When interest rates fall, the present values of future cash flows increase. Thus, today's low interest rates should encourage people to postpone the start of benefits.

    Factors Affecting Couples

    What factors affect married couples' decision concerning when to start Social Security?

    One factor—perhaps the most important factor—is the applicability of the earnings test.

    Another is each partner's life expectancy. However, due to the rules governing spouse's and survivor's benefits, the life expectancy of the longer-lived spouse is the critical factor.

    Since strategies for couples who are deciding when to begin benefits revolve around spouse's and survivor's benefits, we first discuss the rules relating to and the calculation of these benefits. We then present the associated strategies.

    Spousal Benefits

    A spouse has dual entitlements to Social Security benefits. A spouse is entitled to the larger of 100% of benefits at Full Retirement Age based on his or her earnings record or up to 50% of the spouse's benefits at Full Retirement Age. When someone applies for benefits, the Social Security Administration calculates his or her benefits based on that person's own earnings record and the spouse's record, and it pays the larger amount. However, in general, someone cannot begin benefits based on his or her record and later switch to benefits based on the spouse's record, or begin benefits based on the spouse's record and later switch to benefits based on his or her own record. One exception would be if a wife retires and begins benefits while her husband continues to work and delays benefits. The wife could begin benefits based on her own record now and later switch to spouse's benefits when her husband retires.

    TABLE 3. Norm's Payoffs from Social Security
    Age Years Strategy A Strategy B Strategy C
    62 1 $900/mo.    
    63 2 $900/mo.    
    64 3 $900/mo.    
    65 4 $900/mo.    
    66 5 $900/mo. $1,200/mo.  
    67 6 $900/mo. $1,200/mo. $1,296/mo.
    68 7 $900/mo. $1,200/mo. $1,296/mo.
    … … … … …
    81 20 $900/mo. $1,200/mo. $1,296/mo.
    Present Value at 62 $162,280 $162,159 $161,557

    Consider the couple, Sara, age 63, and Max, age 66. Both have a full retirement age of 66. Based on her record, Sara has a PIA of $1,000. Based on his record, Max has a PIA of $1,200.

    Now consider Sara's Social Security benefit possibilities. Based on her record, she could begin benefits today at $800 a month; since she is 36 months short of reaching Full Retirement Age, she receives 80% of $1,000.

    Alternatively, Sara may receive spouse's benefits based on Max's earnings record if this amount is larger than benefits based on her own record. The rules for spouse's benefits are more complex. If she had attained Full Retirement Age, Sara would be entitled to 50% of his PIA or $600. Spouse's benefits are reduced by 25/36% for each of the first 36 months that benefits are begun before reaching Full Retirement Age and by 5/12% for each additional month. Since she is 36 months shy of Full Retirement Age, she could receive spouse's benefits of 75% of $600, or $450 a month. In addition, Sara can only begin spouse's benefits before she attains Full Retirement Age if Max has started benefits based on his own record. Lastly, spouse's benefits do not reflect delayed retirement credits. If Max postpones the beginning of benefits until age 68, two years after reaching Full Retirement Age, his benefits based on his own earnings record would reflect the 16% delayed retirement credits, but Sara's spousal benefits would not. In this example, Sara would receive benefits based on her own earnings record since this amount, $800, is larger than her spouse's benefits, $450.

    Survivor's Benefits

    Although we discuss survivor's benefits as if a male dies, the benefits are parallel if a female dies. If a male dies, the following individuals could receive survivor's benefits based on his earnings record: widow, divorced widow, unmarried minor or disabled children, and dependent parents. Here, however, we focus on benefits to widows and divorced widows.

    The widow has dual entitlements under Social Security. She is entitled to benefits based on her earnings record or survivor's benefits based on her deceased husband's earnings record. She can receive full survivor's benefits when she attains Full Retirement Age or reduced benefits as early as age 60. A disabled widow can begin benefits as early as age 50. The same rules apply for divorced widows who were married to the deceased husband for at least 10 years and did not remarry before age 60. [For more information, see “Survivors Benefits” at www.ssa.gov/pubs/10084.html and “What Every Woman Should Know” at www.ssa.gov/pubs/10127.html.]

    The widow receives a percentage of the deceased husband's PIA. If she is Full Retirement Age or older, she receives 100% of his retirement benefits. If she is younger than Full Retirement Age, she receives between 71.5% and 100% of these benefits. The 28.5% maximum reduction in benefits is allocated proportionately between age 60 and Full Retirement Age.

    There are two key differences between survivor's benefits and spouse's benefits. First, survivor's benefits reflect delayed retirement credits, while spouse's benefits do not. Second, someone can begin benefits based on his or her own earnings record and later switch to survivor's benefits, or vice versa. In contrast, such switching strategies are not allowed between spouse's benefits and benefits based on his or her own record.

    TABLE 4. Fran and Mike's Payoffs—Two Strategies
    Age Years Strategy A
    Fran & Mike
    Strategy B
    Fran & Mike
    Difference
    (B —A)
    Difference If
    Mike Were Single
    Difference With
    Survivor's Benefits
    66 1 $2,000/mo. $800/mo. -$1,200/mo. -$1,200/mo.  
    67 2 $2,000/mo. $2,096/mo. $96/mo. $96/mo.  
    68 3 $2,000/mo. $2,096/mo. $96/mo. $96/mo.  
    69 4 $2,000/mo. $2,096/mo. $96/mo. $96/mo.  
    70 5 $2,000/mo. $2,096/mo. $96/mo. $96/mo.  
    ... ... ... ... ... ...  
    81 16 $2,000/mo. $2,096/mo. $96/mo. $96/mo.  
    82 17 $2,000/mo. $2,096/mo. $96/mo. $96/mo.  
    83 18 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.
    84 19 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.
    85 20 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.
    86 21 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.
    87 22 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.
    88 23 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.
    89 24 $1,200/mo. $1,296/mo. $96/mo.   $96/mo.

    Strategies for Couples

    Both Partners Are FRA or Older

    Fran and Mike are both 66, their Full Retirement Ages. Both partners have retired from the work force. Fran is entitled to $800 per month based on her earnings record, and Mike is entitled to $1,200 per month based on his record. Assuming average life expectancies, Mike will live about 17 years, but their joint life expectancy is about 24 years. Their joint life expectancy is the expected time until the last partner dies. At 24 years, it is longer than either partner's expected life.

    Table 4 presents payments for two strategies assuming Mike lives 17 years, his life expectancy, and Fran lives 24 years, their joint life expectancy. In Strategy A, they both begin benefits today based on their own records. They jointly receive $2,000 a month for the first year and an equivalent real amount in subsequent years until the first dies. After the first dies—it does not matter who dies first—the survivor receives $1,200 per month.

    In Strategy B, Fran begins benefits today, but Mike delays the beginning of benefits for one year. In the first year, they get Fran's $800 per month. In the second and subsequent years until the first dies, they get $2,096 a month—Fran's $800 and Mike's $1,296, which is 8% higher than $1,200 due to the delayed retirement credit. After the death of the first, the survivor receives $1,296 a month.

    The Difference column, B – A, presents the differences by year in monthly payments between these two strategies. The last two columns separate the Difference column into two parts. The second to the last column presents the difference in Mike's benefits if he were single and lived 17 years, his life expectancy. He would forego $1,200 a month the first year but get $96 more per month for the next 16 years. In present value terms, this is a fair trade-off.

    The last column is additional benefits to the couple due to survivor's benefits. Assuming Fran lives 24 years, the couple gets an additional $96 per month in survivor's benefits for years 18 through 24. This last column is the approximate increase in present value of joint benefits if the higher earner—Mike in our example—delays the beginning of benefits based on his record by one year.

    The structure of Social Security benefits does not appear actuarially fair to couples. Rather, it encourages the higher earners to delay the beginning of benefits. The additional value from postponing is approximately equal to the additional survivor's benefits.

    One lesson from Table 4 is that, as long as their joint life expectancy exceeds 17 years, the higher earner should delay the beginning of benefits. An extreme example emphasizes this point.

    Suppose Mike is terminally ill and has one year to live, but Fran comes from a line of long-lived ancestors and has a 24-year life expectancy. By delaying benefits for one year, the couple loses $1,200 a month for the first year but will likely receive an additional $96 a month for 23 years. In this example, the costs and benefits from Mike delaying his benefits one year are the same as the Difference column in Table 4.

    Let us examine another question that applies to married partners who have both reached Full Retirement Age. Should the lower earner also delay the beginning of benefits based on his or her record?

    TABLE 5. Fran and Mike's Payoffs—Third Strategy
    Age Years Strategy B
    Fran & Mike
    Strategy C
    Fran & Mike
    Difference (C —B)
    66 1 $800/mo. $0/mo. -$800/mo.
    67 2 $2,096/mo. $2,160/mo. $64/mo.
    68 3 $2,096/mo. $2,160/mo. $64/mo.
    69 4 $2,096/mo. $2,160/mo. $64/mo.
    Until death
    of 1st   $2,096/mo. $2,160/mo. $64/mo.
    After death
    of 1st   $1,296/mo. $1,296/mo. $0/mo.

    Let's return to the previous example and compare two strategies. Table 5 compares these strategies. Strategy B was described earlier: Fran begins benefits at Full Retirement Age, and Mike delays benefits one year. In Strategy C, Fran and Mike both postpone the start of benefits one year. Beginning in one year, they will receive a combined monthly benefit of $2,160—her $864 and his $1,296. The Difference column (C – B), is the key column. When both partners delay benefits instead of just the higher earner, the couple loses $800 a month the first year, but gains $64 a month thereafter until the first spouse dies. Assuming a 3% discount rate, they would both have to live at least 17 years for Strategy C to be preferred in present value terms.

    Even if both Mike and Fran have average life expectancies, the probability is greater than 50% that one of them will die before 17 years pass.

    In short, the lower earner should begin benefits today. In this example, Mike should delay benefits if their joint life expectancy exceeds his 17-year life expectancy, while Fran should begin payments early if one of them is likely to die before 17 years.

    If Fran begins benefits at Full Retirement Age, how much larger is the present value of projected benefits if Mike delays the beginning of benefits?

    Table 6 presents the analysis for this example where each partner is age 66 and has an average life expectancy. As Mike postpones the beginning of benefits, the present value relatives rise from 98% at age 66 to 100% at age 69. Most of the additional benefit comes from the higher earner delaying the beginning of benefits from age 66 to 67.

    TABLE 6. Relative Present Values of Benefits When Higher Earner Delays Benefits Until After full Retirement Age
    Age 66 67 68 69 70
    Present Value Relatives 98.00% 99.10% 99.70% 100.00% 99.90%

    However, the value added from having the higher-earning spouse postpone the start of benefits would be much greater if the lower-earning spouse is much younger and healthy.

    Lesson: If they have both reached Full Retirement Age, there is an advantage for the lower-earning partner to begin benefits and the higher-earning partner to delay benefits. This advantage is especially large when the lower-earning partner is healthy and much younger.

    One Partner Depends on Spouse's Benefits

    Some partners will receive more from their spouse's benefits than from benefits based on their own earnings record. This scenario applies to a stay-at-home wife. It also fits some employees of state and local governments and some teachers because of the Government Pension Offset [for more information, see the February 2002 Portfolio Strategies article].

    What should this type of couple's strategy be?

    Sam and Sue are both 62 with Full Retirement Ages of 66. Sam just retired from work, and Sue has not worked outside the home. Sam has a PIA of $1,000. They are deciding when to begin benefits. Although Sue qualifies for spouse's benefits, she cannot receive these benefits until Sam begins payments.

    Table 7 presents the present value relatives for such couples with average life expectancies. The maximum present value occurs when benefits begin at Full Retirement Age—age 66 in this example.

    The key to the analysis is that the reduction in spouse's benefits is severe when benefits begin before Full Retirement Age. The spouse's benefits fractions at ages 62 through 65 are 70%, 75%, 83.3%, and 91.7%, while the corresponding fractions when benefits are based on one's own record are 75%, 80%, 86.7%, and 93.3%. Since the benefits fractions for benefits based on one's own record are actuarially fair (as shown in the tables for single men and women), it follows that the reductions for spouses beginning benefits before Full Retirement Age are actuarially harsh.

    Consequently, there is an incentive to delay the beginning of the spouse's benefits until Full Retirement Age. However, the couple should not postpone benefits beyond Full Retirement Age. Although delaying benefits beyond Full Retirement Age would raise Sam's benefits, it would not increase Sue's benefits since spouse's benefits do not reflect delayed retirement credits.

    Lesson: For couples where one partner depends on spouse's benefits, that partner should consider delaying the beginning of benefits until he or she reaches Full Retirement Age—unless he or she has a short life expectancy.

    Switching Strategies Involving Survivor's Benefits

    Jack and Beth are both 62 with Full Retirement Ages of 66. Jack has a PIA of $1,000 and Beth has a PIA of $800 based on their personal earnings records.

    Neither partner currently receives Social Security benefits. Jack dies, and Beth decides to begin benefits today. The second and third columns of Table 8 present two of her options. In Strategy A, she begins reduced benefits on her own record of $600 per month today, and later switches to survivor's benefits of $1,000 per month at Full Retirement Age. The present value of this strategy at age 62 is $181,125. In Strategy B, she begins reduced survivor's benefits of $810 per month today, and then switches to benefits of $1,056 based on her own record at age 70, which includes an increase in benefits due to delayed retirement credits. The present value of this option at age 62 is $189,379. Based on the average female's 24-year life expectancy, Strategy B has the larger present value.

    Beth can only begin survivor's benefits and later switch to her own benefits if she had not already begun benefits based on her own record.

    Now, let's return to this example but suppose they learn at age 62 that Jack has a terminal illness. Beth should not begin payments on her own record since this would preclude her from applying for survivor's benefits and later switching to her own benefits.

    TABLE 8. Switching Strategies Between Survivor's Benefits and Benefits Based on own Earnings Record
      Beth's Strategies Beth's Strategies Jack's Strategies
    A B C D E F
    62 $600/mo. $810/mo.        
    63 $600/mo. $810/mo.        
    64 $600/mo. $810/mo.        
    65 $600/mo. $810/mo.        
    66 $1,000/mo. $810/mo. $1,000/mo. $1,000/mo. $1,000/mo. $800/mo.
    67 $1,000/mo. $810/mo. $1,000/mo. $1,000/mo. $1,000/mo. $800/mo.
    68 $1,000/mo. $810/mo. $1,000/mo. $1,000/mo. $1,000/mo. $800/mo.
    69 $1,000/mo. $810/mo. $1,000/mo. $1,000/mo. $1,000/mo. $800/mo.
    70 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    71 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    72 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    73 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    74 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    75 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    76 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    77 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    78 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    79 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    80 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    81 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    82 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo. $1,000/mo. $1,320/mo.
    83 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo.    
    84 $1,000/mo. $1,056/mo. $1,000/mo. $1,056/mo.    
    PV $181,125 $189,379 $173,629 $180,822 $159,649 $187,244

    Now suppose that Jack and Beth both have attained Full Retirement Age of 66. Their PIAs are still $1,000 and $800, respectively, and neither receives benefits currently. Jack dies, and Beth elects to begin benefits today. The fourth and fifth columns of Table 8 present two of Beth's options. In Strategy C, she begins survivor's benefits of $1,000 per month today and continues to receive these benefits until her death. In Strategy D, she begins survivor's benefits of $1,000 per month today and later switches to benefits of $1,056 based on her own record at age 70. Strategy D is clearly the better choice.

    Now let's use the same facts as the scenario above except assume that Beth dies rather than Jack. Strategies E and F present two of Jack's options. In Strategy E, Jack starts payments of $1,000 on his own record and continues to receive these benefits until he dies. In Strategy F, he begins survivor's benefits of $800 today and switches at age 70 to his own benefits of $1,320, which is 32% more than his PIA due to delayed retirement credits. Based on the average male's 17-year life expectancy, Strategy F has the much larger present value.

    To understand why the advantage is substantial, consider the trade-off if Jack were never married: We saw earlier that, for singles, there is little difference in present value terms between receiving $1,000 a month beginning at age 66 or receiving nothing for four years and then $1,320 per month beginning at age 70. In contrast, due to survivor's benefits, when Jack postpones switching to his own record at age 70, he still gets $800 a month in survivor's benefits for four years. This $800 a month between ages 66 and 69 is close to a pure gain in present value terms.

    Finally, survivor's benefits can begin at age 60 (or at age 50 if disabled), while spouse's benefits can begin at age 62. Consequently, if one partner dies at a young age (before age 62), the survivor should generally begin survivor's benefits as soon as possible and later switch at age 70 to benefits based on his or her own record.

    Lesson: Many individuals who are eligible for benefits both as survivors and based on their own earnings records should begin survivor's benefits immediately, and apply for benefits based on their own records at age 70. This strategy is usually optimal when the level of benefits based on their own records at age 70 exceeds the level of survivor's benefits.

    A Summary: When To Start

    When should you begin Social Security benefits?

    The best strategy is the one that maximizes the present value of projected future benefits. In this article, we've discussed factors that should influence when someone applies for benefits.

    The analysis for single males and females is relatively straightforward:

    • Individuals affected by the earnings test should seldom begin benefits before attaining Full Retirement Age. The exception is a single individual with a terminal illness and with no dependents who will receive survivor's benefits. Since no one will receive survivor's benefits, it is better to receive reduced benefits than no benefits.

    • Individuals with much shorter-than-average life expectancies should begin benefits early, while individuals with much longer-than-average life expectancies should begin benefits late. The analysis for married couples is more complex:

    • Individuals affected by the earnings test should seldom begin benefits before attaining Full Retirement Age.

    • A long life expectancy also encourages delaying benefits. However, with a couple, the life expectancy of the longer to live is usually the key factor. In general, if either member of the couple has a long life expectancy, the higher-earning member should postpone the beginning of benefits based on his or her earnings record until after Full Retirement Age.

    • Since survivor's benefits reflect delayed retirement credits, it usually pays for the higher earner to delay the start of benefits beyond Full Retirement Age. The advantages of the higher earner delaying benefits are especially strong if the lower-earning partner is much younger and healthy.

    • In general, in couples where one partner relies on spouse's benefits, that partner should delay the beginning of spouse's benefits until Full Retirement Age, since the penalty for beginning spouse's benefits earlier is severe—unless the lower-earning spouse has a short life expectancy.

    • Someone can switch from survivor's benefits to benefits based on his or her own record, or from benefits based on his or her own record to survivor's benefits. Suppose one spouse dies before the other partner begins benefits. It often pays for the widow or widower to begin survivor's benefits and then switch to benefits based on his or her record at age 70. By delaying benefits based on his or her own record until age 70, he or she maximizes the size of the delayed retirement credits. Yet, he or she still receives survivor's benefits in the interim.
    It is important to note that our analysis only examined benefits paid to single individuals and married couples—it did not consider payments to children or other dependents. It also ignores income tax consequences. Some taxpayers may be forced into a higher tax bracket after age 70½ due to required distributions from certain retirement accounts. They may not want to delay Social Security benefits if doing so would subject these payments to a higher tax rate. For additional information, see Thomas W. Batterman's article, “Coordinating IRA Distributions With Social Security Income,” in the April 1999 issue of the AAII Journal; available at www.aaii.com.


    Kirsten A. Cook is a master of accountancy candidate at Baylor University. William W. Jennings, CFA, is deputy head for management education at the U.S. Air Force Academy. William Reichenstein, CFA, holds the Pat and Thomas R. Powers Chair in Investment Management at Baylor University. The opinions expressed are those of the authors and are not necessarily those of USAFA, USAF, or any other federal agency.

    The authors may be reached via E-mail at Kirsten_Cook@baylor.edu, William.Jennings@usafa.af.mil, and Bill_Reichenstein@baylor.edu.

    The authors thank Wes Davis, regional communications director, and technical experts at the Dallas office of the Social Security Administration for their careful review of this paper. Also, they thank Tom Walsh for his valuable input.


→ William Reichenstein