A Framework for Claiming Social Security

At Abundo Wealth, we have a growing team that provides individualized advice to every client based on their unique circumstances. However, we prioritize applying a consistent framework for providing that advice across our practice.

Our process to develop this framework is to discuss topics among our advisor team and reach consensus on the best approach for advising clients. Then a member of our team codifies this approach into a shared resource that we can all refer back to and modify as necessary over time.

I asked Olivia Lima to share the high-level framework she created for our firm’s approach to helping clients determine the optimal strategy for claiming Social Security retirement benefits in the form of a blog post. Take it away Olivia….

Is there an optimal Social Security claiming strategy? 

Although I know this will pain the optimizers among us, it turns out the “optimal” age to claim Social Security is quite difficult to determine—and in fact not literally solvable. There are however excellent tools available to view your options and make an informed decision.

What are you maximizing? 

One reason optimization is hard is that people have different goals. You could aim for the highest:

1. immediate income (bird in the hand!), 
2. total projected lifetime benefits, 
3. total projected lifetime value of benefits (including time value of money with investment of early benefits), or
4. late-life monthly income. 

Our preference is the latter, for reasons I’ll describe.  However, you’ll need to decide for yourself. 

Moving targets

It’s also important to be aware of quirks of the system, especially if you have ever been married. Spousal (and ex-spousal) benefits, Survivor (widowed) benefits, and a worker’s own earned benefits all follow different timelines and rules.

The actual amounts you qualify for will depend on the progression of your own life and that of your current, past, and future spouses. Remain alert to how your eligibility may change over time.

Potential Law Changes

Congress is another major unknown. However, we do believe Social Security will continue to exist in some way going forward.

We do not recommend taking benefits early simply to dodge changes. That is not likely to help, since any changes enacted are likely to have provisions grandfathering people who are already eligible to receive benefits.

If you’re concerned, you can always use a lower estimate when preparing for retirement, but don’t file a claim early.

Humility is required

None of us can literally calculate an optimal strategy, since we don’t know how long we will live. My own mother claimed at 62 and spent the funds—a focus on immediate income that is clearly suboptimal from a long-term perspective. Yet sadly she died at 64.  For her, those benefits did meaningfully improve what turned out to be the last years of her life.

Related: Are You Lucky or Good?

Our Approach: Maximizing Late-Life Income

Social Security was initially designed as insurance (“Old Age & Survivors’ Insurance”), and in our opinion it functions best that way. It is a rare guaranteed, inflation-adjusted annuity—a hedge that literally cannot be bought. 

Therefore, it provides a floor of income late in life which protects you against three key risks:

1. longevity, 
2. market risk, and 
3. major financial mistakes.

For those of us who are avid investors, mistakes may be hard to imagine—but consider that this income is intended to support you into your 80s and 90s. If you (or your spouse) ever lose mental acuity, suffer from dementia, or fall victim to a scam, your investment portfolio could be decimated.

In that case—just as in the case of extremely unlucky markets—Social Security would become a critical backstop. That’s why we recommend maximizing late-life monthly benefits, especially once a person is living alone.

If late-life income is your target, most people (especially the highest earner in a couple) should wait to file until age 70.

You should file sooner, though, if claiming spousal (50%) or survivor (100%) benefits, since those max out at earlier ages. I’ll aim to discuss this succinctly below, but the rules are complex and there are exceptions. Schedule a consultation with your local Social Security office to confirm your individual options before making a decision.

Key Principles to Consider When Deciding When to Claim Social Security

Claiming Benefits Before or After Full Retirement Age

Full retirement age is 67 for anyone born in 1960 or later. If you were born before 1960, you can calculate your full retirement age with this calculator from SSA.

The earliest possible age to claim is 62. Your maximum benefit is available at age 70.

Each month you delay beyond your full retirement age increases your own earned benefit (8% per year or 2/3% per month) for a maximum 24% increase if you wait until age 70.

Conversely, your benefit is reduced by 5/9% per month if you claim in the three years prior to your full retirement age and another 5/12% per month in the 4th and 5th years before your full retirement age. Thus, someone with a full retirement age of 67 who claimed as early as possible at age 62 would permanently decrease their monthly benefit by 30%.

Multiple benefits

You might qualify for multiple benefits (your own, spousal, and/or survivor) but can only receive an amount equal to the highest available benefit—not their sum. Social Security “adds” benefits like spousal onto your own, but only up to the higher amount.

For example, if you qualify for $500 of your own and $1,000 spousal, you will receive $1,000 ($500 your own + $500 spousal), not $1,500.   

Widows’ loss

This means couples who both receive benefits will lose income when the first person dies, since the survivor will keep only the higher of the two benefits, not both.

Working longer vs Retiring early

Your own benefits are based on the average of your 35 highest working years. If you left the workforce (e.g., to care for family) there may be zeroes in the average, so working longer could increase your benefit.

In general, because of bend-points in the formula, working additional years is most helpful for people with low lifetime income. (At higher income there are diminishing returns.)

If you downshift or retire early, your benefit may not reach what you see today on your Social Security statement. The statement shows the amount (in today’s dollars) you would qualify for if you continued working at your current salary until you claim benefits (or until you reach the maximum).  To estimate the benefit you’d receive if retiring early, use a calculator like ssa.tools.

Related: How Does Retiring Early Impact Social Security Benefits

Work After Claiming Social Security Benefits

Working AFTER claiming is penalized: A portion of SS benefits (0% to 85%) is taxable, depending on total income, so working after you file for benefits can create a high marginal rate by exposing both your new wages and your benefits to taxation.

In addition, if you claim before full retirement age and keep working, a portion of your benefits will be temporarily withheld (to be repaid over time).

Summary Decision Tree

These are the ages we recommend claiming benefits to maximize late-life monthly income. This assumes you CAN afford to choose when to file, because you don’t absolutely need the benefit today.

If you cannot afford to fund your lifestyle from income or assets, you may be forced to file early—but proceed with caution.  If you have a habit of overspending, making budget cuts now will be better. 

1. Never Married: @70, unless you can’t afford to wait, or strongly believe you won’t live past 75.

2. Couple (Higher Earner): @70, even if you don’t expect to live long (for the sake of your widow).

3. Couple (Lower Earner)

• The greatest flexibility exists for the lower earner in a couple, since this is not a lifetime decision—it only affects the period when both of you are alive and claiming, which might be brief.
• Tools like Mike Piper’s Open Social Security recommend early claiming because they use standard mortality tables, and hence don’t predict both spouses will live long. As always, if you want the maximum monthly floor you should delay until these ages, but if you prefer to maximize lifetime total you can use Mike’s tool. It is ok to file earlier—especially if that makes it easier for the higher earner to wait until 70!
• Spousal @67 if Spousal is larger and spouse has already filed.
• Own @67 if Spousal is larger but spouse hasn’t yet filed—then add Spousal when they file.
• Own @70 if your own benefit is larger than your spousal benefit(especially if still working and/or you both expect long lives) OR if married <10 yrs (and you want protection in case you lose Spousal benefit to divorce).
  • SS terminology makes this concept confusing without an example:
    • Pat’s Own benefit is $2,000; 
    • Alex’s Own benefit is $3,000.
    • Alex is the higher earner, but Pat’s Spousal benefit would be only $1,500, so lower than their Own benefit of $2,000.

4. Divorced: [if ex-spouse still alive—otherwise, use Widowed]

• Spousal @67 if you qualify and Spousal is larger
• Own @70 if you don’t qualify OR Own is larger

5. Widowed: 

• Survivor @60 if Survivor is smaller—then add Own @70
• Own @62 if Own is smaller—then add Survivor @67

Exceptions and Further Resources:

This framework is a helpful starting point for the most common scenarios you are likely to face. However, it is not meant to be an exhaustive list of all scenarios, nor is it meant to be specific advice for any individual.

Below is a list of additional resources that you may find helpful. It is also recommended to contact the Social Security Administration to verify any uncertainties before making any claiming decisions.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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