AAII, the American Association of Individual Investors

Social Security: Delay Benefits at the Expense of Personal Savings?

by Marty Allenbaugh

With the exception of only the top income quintile, Social Security is the largest source of retirement income for all Americans.

While many retirees also heavily rely on their investments to provide income, they face a challenge in balancing their personal savings against Social Security benefits.

The problem is that retirees have two goals that often compete:

  • Obtain the highest Social Security benefits and, if married, the highest benefits for the surviving spouse. This generally entails delaying benefits, ideally to the latest possible age of 70.
  • Minimize savings withdrawals in the early years of retirement, particularly before 70. This generally entails taking benefits as early as possible.

However, since it is difficult for those who retire before age 70 to do both, investors should be looking for the best compromise for their situation.

Even for middle-income retirees, the outcomes can vary by hundreds of thousands of dollars. The free T. Rowe Price Social Security Benefits Evaluator tool (troweprice.com/socialsecurity) can help preretirees choose their strategy. Using that tool, a T. Rowe Price study examined some of the trade-offs involved, which depend on retirees’ marital status.

Singles

Unmarried individuals have fewer options than those who are divorced or married couples when balancing Social Security versus withdrawals.

Key to understanding all options is that initial Social Security benefits increase for everyone by about 8% (plus inflation) for every year recipients can delay benefits from age 62 to 70. Benefits can be roughly 75% greater at age 70 than 62. Also, for a retirement that could last until age 95 (T. Rowe Price’s standard planning assumption), stopping work at age 62 and taking Social Security at 62—as many do—can mean almost double the savings withdrawals versus working until age 70.

As a result, we recommend that singles work full- or part-time as long as possible—to at least age 66, if not 70—so as to delay Social Security benefits and limit savings withdrawals. There can be a very heavy price for delaying Social Security in terms of higher early savings withdrawals but, if working longer—even part-time—is possible, singles may be able to take benefits later and reduce withdrawals before 70. In the long run, they would be less likely to run out of savings, and their Social Security benefits would be larger.

The Divorced

Single individuals divorced after at least 10 years of marriage (and a two-year waiting period) have an additional option if they have not remarried: the “spousal benefit.” Even if their ex-spouses have remarried, the divorced party could delay their own benefits from age 66 to 70 by taking the spousal benefit for four years starting at 66. (Those who are divorced can take a lower level of spousal benefits as early as 62, but if they want to later switch to their own higher benefits, they must wait until age 66.)

At age 66—Social Security’s current full retirement age—the spousal benefit equals half of the ex-spouse’s benefit at the ex-spouse’s full retirement age. Ex-spouses do not yet have to be receiving their own benefits for the spousal benefit to be paid, but they do have to be at least age 62. (See the Social Security Administration website, www.ssa.gov, for details.)

Both ex-spouses, if single, can simultaneously get this benefit, unlike married partners who can’t get the spousal benefit at the same time.

Table 1 illustrates the annual sources of income for three of the strategies that married couples could use to take their Social Security benefits. The “split” strategy may provide a way for married couples to reduce their savings withdrawals before age 70, while still obtaining roughly the same lifetime Social Security benefits as under the “maximize” strategy.
The three strategies are:

  • Early: Both spouses—three years apart in age—retire when the higher-earning older one is 62 and the lower-earning younger one is 59. Each begins his or her Social Security at 62. As shown, this enables the least savings withdrawals prior to 70 of the three strategies but leads to the lowest lifetime Social Security benefits, the highest lifetime withdrawals, and the lowest survivor benefit.
  • Split: The lower-earning spouse takes Social Security at age 62. The higher earner takes spousal benefits at 66 and then his or her benefits at 70. This increases lifetime Social Security benefits by more than $340,000 over the early strategy, reduces lifetime withdrawals by the same amount, and increases the survivor benefit to the same level as under the maximize strategy.
  • Maximize: Both spouses wait until each is age 70 to take their own Social Security benefits. The lower earner takes spousal benefits at age 66. This strategy yields roughly the same Social Security benefits as the split strategy, but its pre-70 withdrawals are about $130,000 more.

Assumptions: A married couple, three years apart in age. The higher earner was born on 12/31/51 and earns $98,000; the lower earner was born on 12/31/54 and earns $68,000. (All ages in the charts are for the older spouse unless noted as the survivor’s.) They plan to replace 75% of their preretirement income, which would be $124,500 a year. All dollar amounts are in today’s constant dollars. Older spouse dies at 83; younger one at 95—thus, retirement period covers 36 years. Surviving spouse also needs $124,500 a year.

Table 1. Results of 3 Options for Married Couples

Strategy   Sources of $124,500  Annual Income
    Social Security ($) Savings Withdrawals ($)
Early Strategy
  62–64 21,978 102,522
  65–69 40,788 83,712
  70–82 40,788 83,712
  80–94 Survivor 21,978 102,522
Split Strategy
  62–64 — 124,500
  65 18,810 105,690
  66–69 31,350 93,150
  70–82 57,491 67,009
  80–94 Survivor 38,681 85,819
Maximize Strategy
  62–68 — 124,500
  69 14,652 109,848
  70–72 53,333 71,167
  73–82 71,787 52,713
  80–94 Survivor 38,681 85,819

  Early Strategy Split Strategy Maximize Strategy
  Total Withdrawals ($) Soc. Sec. as % Total Joint Lifetime (%) Total Withdrawals ($) Soc. Sec. as % Total Joint Lifetime (%) Total Withdrawals ($) Soc. Sec. as % Total Joint Lifetime (%)
Withdrawals to 69 726,126 16 851,790 19 981,348 22
Withdrawals 70+ 2,626,068 59 2,158,402 48 2,027,916 45
Social Security 1,127,788 25 1,471,808 33 1,472,736 33
Total Joint Income 4,482,000 100 4,482,000 100 4,482,000 100
Source: Estimated Social Security benefits from the T. Rowe Price Social Security Benefits Evaluator tool, available at troweprice.com/socialsecurity. Additional disclosure at the end of this article on page 34.

Married Couples

For married couples, there are seemingly endless variations in the trade-offs among initiating Social Security benefits, taking savings withdrawals, taking the spousal benefit and working longer. The T. Rowe Price study looked at three options: both partners taking benefits as early as possible; both waiting as long as possible to maximize benefits; and a “split” strategy that could provide joint lifetime benefits similar to the maximize strategy, but with lower early savings withdrawals. The box on here shows the results.

Significantly, the split strategy not only matched the maximum benefit strategy in terms of lifetime income from Social Security, but also could provide the same survivor benefit as the maximize strategy (the younger lower-earning spouse would receive the larger benefit of the higher-earning deceased spouse). And while the survivor benefit is often overlooked, we recommend that every married couple consider it. In the study, the higher earner is three years older than the younger lower earner, and the lower earner stops working at age 59. If the age gap were smaller, the split strategy would be even more advantageous. If it were larger, it would be less favorable.

Last, there are two other ways this couple could reduce lifetime withdrawals by more than 20% combined. Withdrawals could drop:

  • By 9% if the surviving spouse is able to live on three-quarters of the couple’s retirement income; and
  • By another 14% if both spouses wait to retire until the younger spouse turned 62 (and the older spouse turned 65).

Further assumptions and disclosures for this article and table: All results are in today’s pretax dollars, representing current purchasing power. Future Social Security benefits may be larger due to possible cost-of-living increases aimed at keeping up with inflation. The results of the T. Rowe Price Social Security Benefits Evaluator are estimates based on users’ inputs, situations and goals, as well as current Social Security law, formulas, and rulings, available from the Social Security Administration (www.ssa.gov). The results are generic and for illustration purposes only. The tool’s strategies are reasonable suggestions, not specific recommendations. Other reasonable strategies may exist for the information provided by the user. The results are not guaranteed by T. Rowe Price Investment Services, its parent companies, its affiliates, or its subsidiaries.