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Social Security Strategies for Singles

by William Reichenstein and William Meyer

Social Security Strategies For Singles Splash image

In this second of a three-part series on claiming Social Security benefits, we present two of the four key points we hope to convey.

The first is that individuals and couples should use two criteria when deciding when they will begin benefits. The second key point is that the breakeven age when cumulative lifetime benefits for the single individual will be approximately equal no matter what age benefits actually begin is 80. To assist with explaining our analysis, we have included Table 1, which shows the age requirements for Social Security eligibility, from last month’s article “Social Security Basics” (AAII Journal, October 2013).

The strategies in this article assume that no one else can receive benefits based on the individual’s earnings record. If a spouse, children or parents can receive benefits based on the single’s earnings record, then the material presented here is not sufficient to make the claiming decision. The strategies further assume no pension is received from work not covered by Social Security (e.g., public-school teachers, police officers, firefighters and other government employees). Finally, the strategies are based on the current promises of the Social Security system, which may change.

Age 80 and Cumulative Lifetime Benefits

We’ll start with Lesson 1, which is: If a single individual lives to age 80, the cumulative lifetime benefits will be approximately the same whether benefits begin at age 62, 63, 64 or any age through 70. This is not an accident. The Social Security Administration’s SSA actuaries set the reductions to benefits for beginning benefits before full retirement age FRA. They also set the delayed retirement credits for postponing benefits until after full retirement age so that the benefits would be approximately fair on an actuarial basis, assuming a 3% real return on Treasury securities.

Table 2 presents the cumulative lifetime benefits in today’s dollars through ages 70, 75, 80, 85, 90, 95 and 100 if Social Security benefits begin at ages 62 through 70. It assumes the individual has a full retirement age of 66 and primary insurance amount of $2,000, but the relative sizes of cumulative lifetime benefits are identical for other primary insurance amount levels. All benefit amounts are expressed in today’s inflation-adjusted dollars. Therefore, cumulative benefits represent the lifetime consumption power of Social Security benefits (ignoring taxes).

The age 80 column in Table 2 illustrates this lesson. If the single retiree lives to 80, cumulative lifetime benefits are approximately the same no matter what age benefits begin. Age 80 is the age where cumulative benefits are “closest” no matter when benefits actually begin, where close is measured by the standard deviation of the column of numbers.

Table 2 demonstrates that if a single individual dies much sooner than 80, cumulative benefits are maximized when benefits begin at 62. And if the individual lives much longer than 80, cumulative benefits are maximized when benefits begin at 70. For example, if the single individual lives to 75, cumulative lifetime benefits are maximized at $234,000 when benefits begin at 62, [$1,500 per month x (12 months) x (13 years)]. This cumulative benefits level is $18,000 larger than if benefits begin at 66 and $75,600 larger than if benefits begin at 70. If the individual lives to 90, cumulative lifetime benefits are maximized at $633,600 when benefits begin at 70. This cumulative benefits level is $57,600 larger than if benefits begin at 66 and $129,600 larger than if benefits begin at 62.

Table 3 presents breakeven ages between two starting dates. It presents breakeven points for starting Social Security benefits at age 62 instead of 63 (62 versus 63), 63 instead of 64, and so on through starting benefits at age 69 instead of 70. For example, the breakeven age of 78 means that the cumulative benefits in today’s dollars are the same if a single individual starts benefits at 64 or 65 and dies in the month of his or her 78th birthday. It also shows the breakeven points for starting Social Security at age 62 instead of 66 and other combinations. In general, the breakeven points tend to be a couple of years sooner than age 80 in the early years (e.g., 62 versus 63, and 62 versus 66) and a few years later than 80 in the later years (e.g., 69 versus 70, and 66 versus 70).

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Table 1. Social Security Eligibility

This table shows the full retirement age (FRA) for your own and spousal benefits. A retiree would receive the primary insurance amount (PIA) if his own benefits are begun at FRA. It also shows the reductions and credits for early and delayed benefits.
 
      Age 62 Per Month Age 70
  Full   Benefit Delayed Benefit
Year of Retirement Per Month Reduction to PIA If as % Retirement Credit as %
Birth* Age Benefits Begin Prior to FRA** of PIA (%) of PIA
1943-54 66 5/9% for 36 mos + 5/12%/mo 75.00 3-Feb 132
1955 66 and 2 mos 5/9% for 36 mos + 5/12%/mo 74.17 3-Feb 130.67
1956 66 and 4 mos 5/9% for 36 mos + 5/12%/mo 73.33 3-Feb 129.33
1957 66 and 6 mos 5/9% for 36 mos + 5/12%/mo 72½ 3-Feb 128
1958 66 and 8 mos 5/9% for 36 mos + 5/12%/mo 71.67 3-Feb 126.67
1959 66 and 10 mos 5/9% for 36 mos + 5/12%/mo 70.83 3-Feb 125.33
1960 or later 67 5/9% for 36 mos + 5/12%/mo 70.00 3-Feb 124
*Social Security considers people born on January 1 to have been born in the prior year. 
**The monthly reduction is 5/9% for the first 36 months prior to full retirement age, and 5/12% for every month after the first 36 months.

In short, if a single individual dies well before 80, he will maximize lifetime benefits by starting benefits at 62. If he lives well past 80, he will maximize lifetime benefits by starting benefits at 70. Table 3 explains why we used the two qualifiers “well before” and “well past” in the prior sentence. These two qualifiers allow us to state Lesson 1 succinctly. Nevertheless, you should be aware of the breakeven ages in Table 3 when deciding when to begin benefits.

If the only objective is to maximize expected cumulative lifetime benefits, we could stop here. However, as we explain next, most retirees should be concerned about two criteria when deciding when to begin benefits.

Two Criteria to Consider

Most retirees will want to consider two criteria when deciding when to begin Social Security benefits.

  • Which starting date for singles, or starting dates for couples, will maximize the present value of cumulative lifetime benefits if the single individual or each partner lives to their precise life expectancy?
  • Which starting date for singles, or starting dates for couples, will minimize longevity risk, that is, the risk that the single retiree will deplete his financial portfolio during his lifetime, or a couple will deplete their portfolio during their joint lifetime?

We suspect that, if left on their own, most single individuals and couples would approach the Social Security claiming decision by thinking the best strategy is the one that maximizes cumulative lifetime benefits if they live to their precise life expectancyies. But nobody knows their precise life expectancy. It is important to understand that the claiming strategy also affects the longevity of the financial portfolio. Many retirees are at least as concerned about minimizing the risk that they will deplete their portfolio during their lifetime. The following example helps illustrate this point.

Age              
Soc Sec              
Benefits Cumulative Lifetime Benefits Through Age
Begin 70 75 80 85 90 95 100
62 $144,000 $234,000 $324,000 $414,000 $504,000 $594,000 $684,000
63 $134,400 $230,400 $326,400 $422,400 $518,400 $614,400 $710,400
64 $124,800 $228,801 $332,801 $436,802 $540,802 $644,802 $748,803
65 $112,000 $223,999 $335,999 $447,998 $559,998 $671,998 $783,997
66 $96,000 $216,000 $336,000 $456,000 $576,000 $696,000 $816,000
67 $77,760 $207,360 $336,960 $466,560 $596,160 $725,760 $855,360
68 $55,680 $194,880 $334,080 $473,280 $612,480 $751,680 $890,880
69 $29,760 $178,560 $327,360 $476,160 $624,960 $773,760 $922,560
70 $0 $158,400 $316,800 $475,200 $633,600 $792,000 $950,400
Primary insurance amount is $2,000 with full retirement age of 66. The bold number in each column indicates the highest cumulative lifetime benefit for that age. (Someone trained in financial economics would correctly insist that we calculate the present value of cumulative benefits. Today, the appropriate inflation-adjusted discount rate is approximately 0%; that is, the real interest rate on comparable risk investments in 10-year Treasury Inflation-Protection Securities [TIPS] is about 0%. Therefore, the present value of cumulative benefits is also cumulative benefits when expressed in today’s dollars. We use the latter terminology, because it is easier to understand. Thus, if one strategy provides a present value of lifetime benefits that is $40,000 higher than another strategy’s, then this first strategy provides cumulative lifetime benefits that are worth $40,000 more in today’s purchasing power.)

Figure 1 illustrates that delaying the start of Social Security can extend a financial portfolio’s longevity. It shows the values of a single retiree’s financial portfolio if he begins Social Security benefits at ages 62, 64, 66, 68 and 70. He begins retirement in 2009 with $700,000 in a 401(k) and he spends $41,700 after taxes in real terms each year. His primary insurance amount is $1,500. If he begins benefits at 62, the portfolio lasts 30 years. By delaying the start of Social Security benefits until age 64, 66, 68 or 70, he can extend the portfolio’s longevity by, respectively, 1+, 2+, 4+ or 6+ years, where 1+ indicates that the portfolio provides full funding for one more year plus part of a second year. Thus, beginning benefits at age 70 instead of 62 extended the portfolio’s longevity by more than six years.

Figure 1. Change in Household Assets
This example assumes the asset(s) earn 5% per year with inflation at 3% per year. It comes from a model developed at Retiree, Inc. The model assumes each year’s taxes are based on then-current 2009 tax brackets, standard deduction amounts, personal exemption amounts, and deduction amount for being 65 or over all adjusted each year with inflation. It uses the three IRS formulas to calculate the taxable portion of Social Security benefits. See www.retireeinc.com for more information. Reprinted with permission by the Financial Planning Association, Journal of Financial Planning, March 2010, William Meyer and William Reichenstein, “Social Security: When to Start Benefits and How to Minimize Longevity Risk.” For more information on the Financial Planning Association, please visit www.fpanet.org or call 1-800-322-4237.

Figure 1 illustrates why both criteria—maximizing benefits and minimizing longevity risk—are important to most retirees. Consider a single individual with a life expectancy of about 80 who will leave his remaining assets to his son. If he lives to age 80, his son will inherit a fair amount and the size of the inheritance will not be particularly sensitive to his starting date. He also wants to consider two other possibilities. If he dies much earlier than age 80, his son will inherit the most if he starts benefits at age 62. This is essentially the same thing as saying if he dies much earlier than 80, his cumulative lifetime benefits would be maximized by starting benefits at age 62. Next, he considers the possibility that he might live to age 95. If he begins benefits at 62, he will run out of money and be a financial burden on his son for his last few years. If he delays benefits until at least age 68, he will not run out of money and his son will inherit a small amount.

Beginning Breakeven
Dates Points (ages)
62 versus 63 78
63 versus 64 76
64 versus 65 78
66 versus 67 79.5
67 versus 68 81.5
68 versus 69 83.5
69 versus 70 85.5
62 versus 66 78
66 versus 70 82.5
62 versus 70 80.5
The “62 versus 63” of 78 means that the breakeven point for delaying beginning benefits from age 62 to 63 is age 78. Therefore, if the individual lives past 78, cumulative lifetime benefits will be higher by delaying benefits from age 62 to 63. The table assumes a full retirement age of 66.

Although this example is for a single individual, the same lesson applies to couples. Many retirees are more concerned about not running out of money than about the amount of money their beneficiaries may inherit. These retirees are more concerned about longevity risk and should be especially interested in delaying their benefits, possibly until age 70.

Figure 1 illustrates the additional portfolio longevity from delaying Social Security for a single individual with $700,000 of wealth. The additional longevity from delaying benefits varies by level of wealth, primary insurance amount and length of planning horizon. This additional longevity decreases as the level of wealth increases. Conceptually, at lower levels of financial wealth, Social Security represents a larger portion of combined retirement resources, that is, financial assets plus Social Security. By delaying Social Security benefits from age 62 to 70, the monthly real benefit level increases by 76%. It should not be surprising, therefore, that delaying benefits can lengthen the longevity of a retiree’s portfolio.

Figure 1 conveys the costs and benefits of delaying Social Security benefits for a retiree with $700,000 of financial assets. For additional examples, we provide case studies with estimates and implications of additional longevity from delaying benefits from age 62 to 70 for single retirees with primary insurance amounts of $1,500 and $2,400 for a wide range of wealth levels, and similar figures for both singles and couples across wealth levels, on our website at www.retireeinc.com/resources/case_studies.html.

Guidance for Singles

Most single retirees are concerned about two criteria: maximizing expected cumulative lifetime benefits and minimizing longevity risk. Due to these dual objectives, it is not always possible to determine the optimal Social Security starting date for a single individual. However, Table 4 provides guidance that we think will serve most singles. It assumes the single individual is concerned about both criteria.

Life Expectancy Start
(Years) Benefits at
Less than 75 62 or ASAP*
At least 75 but less than 77 64
At least 77 but less than 80 67
At least 80 but less than 83 69
At least 83 70
*Depending upon the day of the month on which the single individual was born, the earliest month of eligibility for Social Security benefits may be 62 years or 62 years and one month.
ASAP = as soon as possible.

For example, consider single individuals with full retirement age of 66 and life expectancy of at least 77 but less than 80 years. We recommend beginning benefits at age 67. We base this recommendation on the projected lifetime. It also assumes the single retiree is concerned about both criteria when deciding when to begin benefits.

If this single dies at age 78.5 (the midpoint in this range), cumulative lifetime benefits if benefits are begun at 67 will be about 1% less than the maximum cumulative benefit, which occurs if benefits are begun at 64 years and nine months.

However, beginning benefits at age 67 instead of 64 years and nine months would increase the monthly benefit by 17.8% and thus lower the longevity risk should an individual live considerably longer than expected. We believe most single individuals in this group would consider starting benefits at age 67 to be a good tradeoff between these two criteria.

In our next article, we will discuss strategies for married couples.

William Reichenstein , CFA, holds the Pat and Thomas R. Powers Chair in Investment Management at Baylor University and is head of research at Social Security Solutions, Inc .
William Meyer is founder and CEO of Social Security Solutions Inc., a service that provides personalized recommendations as to when to claim Social Security benefits.


Discussion

John Logger from CA posted 8 months ago:

It was unusual not to have included comments regarding arbitrage. most retirees will have other assets that they can/will deploy to defray retiree costs and arbitrage would normally be a consideration on how to defray those costs. What was the reason this was omitted?


Stephen Levine from CA posted 8 months ago:

Since no one knows the date of his/her death, how is this helpful? I saw where you brought up the question, but I couldn't find your answer. To me a better question is how much will Social Security affect the quality of your life? If you can retire and collect a pension and Social Security at 62, why not do so and enjoy the money while you can? If you have no pension, then put off collecting as long as you can. Social Security recipients, of which I am one, spend the income as it is received. They don't usually use it to feed some investment portfolio, so the lifetime amount they receive is only an accounting exercise speaking simplistically. The important figure, speaking again as a retiree, is the monthly or annual amount of money that a person is likely to get from Social Security. That will determine whether the older person lives in poverty (no other source of income) or in comfort (some form of additional retirement income).


E M Easterly from OR posted 8 months ago:

As a retiree I found this analysis interesting. My decision to collect Social Security was partially deferred in anticipation of a higher monthly amount. The break point between age 62 and full retirement in the past was roughly age 78. This analysis moves the value to age 80.
My actual retirement decision at age 67 was more a function of interest and enthusiasm as an employee. When I lost interest I retired at age 67. This article simple confirms in economic terms that my decision was a fiscally reasonable one.


R Carnwath from AL posted 8 months ago:

The authors should place more importance on the value of an annuity adjusted for inflation! IN THE CURRENT ENVIRONMENT, ASSUMING A 3% REAL RETURN AFTER TAX WITH THE FULL FAITH AND CREDIT OF THE US IS A HEROIC ASSUMPTION. I THINK THE BEST ANSWER FOR MANY IS TO WAIT AS LONG AS YOU COMFORTABLY CAN BEFORE TAKING SOCIAL SECURITY AS IT IS THE CHEAPEST INFLATION PROTECTED SOURCE OF INCOME YOU HAVE. 401K's don't care about longevity risk, or inflation risk.Your Social Security grows at 3% per year plus inflation until age 70, then grows at inflation. If you wait until age 70 to take it, you'll "lose out" if you die before age 80 but you will be protected against earning less than 3% real until age 70 and you will have the highest inflation protected annuity you can buy thereafter which will go on for ever until you die. Less Worry! That's worth a lot!


D Brown from TN posted 8 months ago:

I'm a widower. My late wife would have turned 62 in 2013, and I did turn 62 this year. I've started to collect her SURVIVOR benefits this year, and I expect to start collecting my own benefits when I turn 70 and drop her's. This appears to maximize my SSA income under virtually every scenario.
In effect, it's as if she was alive and started collecting at 62, and then dies at age 70.


John Duff from MA posted 8 months ago:

I wonder if the authors could redo the break even points with discount rates of 2%, 4% and 6%. A discount rate of 0% is fairly accurate today, but perhaps not over a 30 year period. As I understand it, a higher discount rate would push out the break even points.

Excellent treatment of a complex subject.


Ted Schott from NC posted 8 months ago:

Although the article is an interesting exercise in arithmetic it seems to me to ignore two elephants in the room:

1. Social security is very underfunded and conventional wisdom says that the federal government WILL reduce benefits to those that can afford it via a "means test". It is not a matter of if, but when. Conclusion based on that fact is: if you defer taking the money you will probably get less later.

2. Medical/ Biotechnology is moving forward rapidly. Conclusion based on that fact: Life expectancy will increase significantly over the next 20 years.....Plan on IT !


S S from Pa posted 8 months ago:

Will work until it's no longer enjoyable.
Am not relying on soc. Sec.


S S from Pa posted 8 months ago:

Will work until it's no longer enjoyable.
Am not relying on soc. Sec.


Paul Hopler from VA posted 8 months ago:

Are we missing the point of money time value? If a person needs the money at age 62 then there is no point in waiting. If not the funds will go into an over all investment fund. Using your example of 2000/month at 67 or $1500 at 62. If the market moves at the typical 10% and we only assume 7-8%, compounding $1500 /month for 4 years and you have a nice pot of over $80000. Continuing the same growth will yield a return of well over the 500/month (6000/year) shortfall plus you have the money so why wait.


Jim Caldie from WI posted 8 months ago:

Great article. I've always wondered why almost all of the articles I've read before make it sound like you're loosing money if you take it early at age 62, when the truth is you get the same amount of money up to about age 80, you're just not letting the government hang on to it longer. However if you live longer than age 80, you'll benefit from higher payments if you've waited. I like Table 2 Cumulative Lifetime Benefits, and Table 3 Breakeven points. I think it would be great if you could follow up with updates to these tables assuming you took the money at age 62 and invested it a reasonable percentage, instead of leaving it with the government and taking it out later. For instance, what percentage would I need to earn if I took the payments at age 62 in order to have the same income at age 80 that I would have if I had waited to take payments until age 66?


Edwin Perkins from CA posted 8 months ago:

I agree with Paul Hopler. Take the money as early as possible. If not needed for current income, invest the money in an adjustable interest rate mutual fund. At discount rate of 5 percent, money today is worth far more than inflows beginning five years or more down the road. Plus is the retiree needs increased savings for long-term care at 66 or above, he/she will have ready resources available.


Anthony Crocker from CA posted 8 months ago:

A variant of Paul Hopper's comments:

Suppose you have a significant amount of IRA/401K money. If you take Social Security at age 62, maybe you leave the IRA/401K to grow tax deferred until age 70 vs. having to draw upon some of those $ for 8 years if you wait until age 70.

Furthermore RMD's starting at age 70 will push your taxable income higher. You want to start Social Security at 70, further pushing up taxable income? Anyone else think income tax rates might be higher than now in 8 years?


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