Why One of Us is Taking Social Security Now

As an early retiree in my 50s, I tried to factor Social Security into my financial planning. But with more than a decade to go before claiming benefits, the huge social program remained a mythical proposition. The government was going to deposit money in my checking account every month because of “credits” I earned during my working years? With frequent headlines about the Social Security trust fund running out of money in the 2030s, the program seemed all the more ephemeral.

But this spring, in our early-mid 60s now, Social Security became very real. When I downloaded my latest statement from the Social Security Administration (SSA) and punched the numbers into a Social Security calculator, suddenly there was a case for my wife Caroline to begin taking her benefits.

So in this post I’ll offer some background on Social Security, discuss resources for analyzing your claiming decision, and then explain why we chose as we did. Whether you like it or not, whether you ignore it or factor it into your retirement, Social Security is a reality of traditional retirement in the U.S. And for many, it is still a significant component of their retirement income.

Social Security Past and Future

Social Security is the social insurance program created in 1935 and intended to pay retired workers in the U.S. age 65 or older a guaranteed income after retirement.

Contrary to common belief, Social Security is not like a savings or investment account accruing in your name. Rather, it’s an income transfer program from younger workers to older. Back when the program was created, most people lived only a handful of years after they stopped working. And there was a large labor force of younger workers to support them.

Fast forward to modern times with life expectancies in the 80s and a shrinking workforce and it isn’t hard to see that a program designed for an earlier era might have difficulty making ends meet. In late 2022, the Congressional Budget Office predicted that the trust fund behind Social Security will run out by 2033. Without enough funds to pay existing commitments, a 23% reduction in benefits could be triggered unless Congress acts.

The solutions to the problem are straightforward — reduce benefits or increase payroll taxes — but politically painful. It’s anybody’s guess if and when our politicians will tackle the problem.

I suspect that a reduction in benefits is less likely than a raise in payroll taxes, because the older population has more political clout than the younger. And I think the most likely solution is some sort of financial chicanery that involves more unfinanced government spending and consequently increased inflation. So we might receive benefits with less spending power. But nobody knows for certain.

Our Social Security

Pundits will say that Social Security was never intended to be a retiree’s only income. And yet many Americans depend on it that way.

In my retirement planning, I took a middle path. I did not expect Social Security to fully support us, not even close. And I made sure that we had enough assets to muddle through even if Social Security never materialized — a scenario I consider unlikely. But I did incorporate a portion of Social Security, usually 50-75%, into my models as a required component for a comfortable retired lifestyle and some longevity insurance. As is the case for many modern retirees, Social Security will be our only inflation-adjusted income stream guaranteed to last as long as we do. Inflation-adjusted annuities are expensive and hard to find in the private market.

To get a handle on your potential Social Security benefits, it’s essential to create a “my Social Security” account at the Social Security Administration website. I did so many years ago and have a note in my calendar to download my Social Security Statement annually. That document has key data like your earnings record and your projected benefits at different ages.

I won’t go further into how to compute your benefits here, but there is more in Chris’s article from last year on how retiring early impacts Social Security benefits.

This year the data in our Social Security statements was critical. We used it and several other factors to evaluate our Social Security claiming decision:

• our earnings record and our projected benefits
• how long we think we’ll both live
• how much we trust the government to deliver benefits into the future
• our ability to live off other savings and what we think the return will be

Social Security Made Simple

But before making a decision on Social Security, I wanted to brush up on how the program works.

Mike Piper’s Social Security Made Simple has long been my go-to reference for all matters related to Social Security. Piper is a CPA and long-time personal finance blogger, so I trust him as an authoritative source on Social Security.  He has a knack for boiling complex subjects down to their essentials and explaining them in as few words as possible. In only about 100 pages, he clearly answers any question I’ve ever had on the matter. And he’s kept the book up to date with recent changes in the law.

Piper includes handy tables showing the reductions or increases in retirement and spousal benefits depending on your claiming age. These demonstrate the essence of why to consider delaying benefits: you’ll get more each month.

The meat of the book for me is the all-important claiming decision. The book explains and discusses the important “breakeven point” for an unmarried retiree. In essence, if you expect to live to at least age 80.5, you’re better off waiting until age 70 to claim Social Security, instead of doing it earlier. You’ll get more money in the long run that way.

For married couples, the situation is similar, but more complex. The book walks you through the issues for the higher and lower income spouses. It turns out that delaying benefits to maximize the higher-earning spouse’s amount becomes even more valuable for couples, since that larger sum lasts for the duration of both their lives.

The book concludes with six invaluable Social Security rules of thumb. Among other points, they capture an essential tradeoff we all must make: the longer you expect to live, the better it is to delay taking Social Security benefits. But, the higher the real rate of return you can earn on your investments, the better it is to take benefits early.

Open Social Security

The Social Security Administration offers simple, free benefit calculators on its site, and there are others available across the web. But this type of calculator just tells you what you ought to get, monthly, depending on when you claim. They don’t go beyond that to compute when you should claim to maximize benefits.

More sophisticated calculators will optimize your Social Security claiming strategy so you get the most to which you are entitled. Piper put his programming talents to work and created a calculator for optimizing benefits called Open Social Security. It’s quick and easy to use, and it’s totally free!

Open Social Security does the calculations for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and then tells you which claiming strategy is expected to provide the most dollars over your lifetime. It takes an approach based on probabilities and life expectancy.

So, for each claiming strategy being investigated, the calculator multiplies spousal and retirement benefits in a given year by the probability of being alive in that year (using average life expectancies), to calculate a probability-weighted annual benefit. Those annual benefits are then discounted to the present to account for the time value of money, and summed.

The end result is a total present value. The claiming age(s) that have the highest present value are then suggested as optimal. In our case, the recommended strategy looks like this:

• Spouse files for his/her retirement benefit to begin 5/2023, at age 64 and 9 months.
• You file for your retirement benefit to begin 7/2030, at age 70 and 0 months.
• Spouse files for his/her spousal benefit to begin 7/2030, at age 71 and 11 months.

This analysis confirms the general advice from the book for higher-earning partners to delay claiming benefits as long as possible.

Open Social Security offers a handful of options for special situations. The one that interested us most was the ability to choose different mortality tables for the probability calculations. This could be important if you feel that your health differs significantly from the average.

Our Debate

In addition to the standard Social Security Period Life Table, we ran our calculations using the Non-smoker Super-preferred table, which represents an average life expectancy of roughly five additional years.

When using those super-preferred tables, the calculator recommended delaying my wife’s claiming by about a year and a half. That’s because longer lifespans will benefit from delaying and collecting a higher benefit.

Should we do that? We debated which health profile to assume.

On one hand, protecting against longevity risk by maximizing monthly income seems more important than maximizing lifetime income if you die early. The downside of not getting quite so much if you die in your 60s pales next to the downside of running out of money in your 90s.

But, in the end, we decided to hedge our bets by assuming our health was average and starting Caroline’s Social Security sooner. That is also a hedge against possible future cuts in benefits. And it could also help protect our portfolio from damage during additional stock market downturns.

As long as we have minimal protection against longevity risk, a healthy investment portfolio seems like our best bet for long-term security. And, even if we take Caroline’s benefits early, we still get a great deal of longevity protection by delaying my benefits until age 70, which is our plan.

Social Security Solutions

Despite my confidence in Open Social Security, before making such a big financial decision, I wanted a second opinion. I decided to consult one of the leading Social Security calculators that I reviewed years ago. So I paid $20 for the basic Personalized Report from Social Security Solutions.

At one time this was a prominent and respected calculator. I cannot say for certain where it sits in the pecking order now, since I didn’t do another exhaustive review. But the user interface and the textual help occasionally felt a bit dated and awkward. The calculator doesn’t feel like it’s received many updates in recent years. However, the website notes the company was recently acquired by T. Rowe Price, so presumably the calculator will be well supported going forward.

The recommended strategy from Social Security Solutions is similar, but not identical, to Open Social Security:

• Spouse begins benefits based on her earnings record in April 2025 at age 66 and 8 months.
• You begin benefits based on your earnings record in July 2030 at age 70.
• Spouse adds spousal benefits in July 2030 at age 71 and 11 months.

The main difference is Caroline waiting about two years longer to begin benefits.

Social Security Solutions says the recommended solution is “in line with two goals shared by most retirees: maximizing expected lifetime benefits and minimizing longevity risk.” But no specific numbers or analysis is presented to back up how this trade-off is optimized.

Social Security Solutions appears to simply choose the claiming strategy that maximizes lifetime income for your entered life expectancy. Yes, it requires life expectancy as an input — always a dubious proposition. Whereas Open Social Security models that parameter using mortality tables and probabilities. The user doesn’t need to guess at how long they’ll live.

In a page explaining the theory behind their calculator, Social Security Solutions tells us that “the criterion to maximize cumulative lifetime benefits is consistent with the criterion to maximize the present value of benefits, but the former is easier to explain.” Further, the default Analysis Settings are 0% for discount and inflation rates. This makes it appear that Social Security Solutions is essentially ignoring the time value of money. That might be OK for a back of the envelope calculation, but seems like a serious limitation for a commercial tool.

In short, the analysis offered by Social Security Solutions appears less sophisticated to me. Where the two calculators disagree, I’m going with Open Social Security for our decision.

Applying for Benefits

After making our claiming decision, we applied online for Caroline’s benefits at the Social Security Administration web site. Checking all the input carefully, the entire process took us about 30 minutes.

Our first step was to carefully scan her earnings history. Any understated or missing earnings years could seriously impact your benefit.

Following that, we needed to answer several dozen questions. It reminded me of filling out tax forms. Most of the questions were straightforward, but a few were vague or puzzling. And the online help wasn’t always clear.

The question we found most baffling at first was whether Caroline “Wanted to enroll in Medicare Part B?” She is not yet 65 so we were going to sign up for Medicare separately in a month or two. Why was the SSA asking now, and why only Part B, not Part A?

From my initial research, it appears that you are automatically signed up for Part A when you have Social Security and reach age 65. But more understanding and information will be forthcoming as we move through this process and I post an article on Medicare.

We were pleased to see that you can enter a future date to receive benefits, so applying a little early is no problem. We were also pleased to enter our direct deposit information and know we’ll receive Caroline’s benefit as an automatic deposit into our checking account each month.

A few hours after completing the application, Caroline received a follow-up confirmation email saying the SSA would be processing her application and that a representative might call her for more information. So far that hasn’t happened.

We were also told we should receive a letter in the mail within 30 days with a decision. Meanwhile, we could check the status of the application online. Doing that as this post went to press, we were told that a Social Security representative had begun reviewing our application and that the review usually takes two to four weeks. Presumably our automatic deposits will begin at that point.

With a note in my calendar to apply for my Social Security benefits when I turn 70 in some years, we are done with this process for now!

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OUTDOOR ADVENTURE: My new web site explores the books, authors, and trails of the long-distance hiking movement and has more about my forthcoming memoir Rain and Fire In The Sky: Beyond Doubt On The Colorado Trail. Click over to TrailMemoir.com.

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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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