It’s the most consequential math problem many Americans face, 50-some years after they last sat in a classroom sweating over algebra and arithmetic. The question is the optimal time to file for Social Security benefits, and the answer can add or subtract hundreds or thousands of dollars from monthly checks.
The decision is complicated by thousands of Social Security rules and permutations in how couples can take benefits. To help, financial firms are building more sophisticated online tools to help clients test out filing strategies. Insurance company Nationwide Financial unveiled a new tool for advisers late last month. Online investment adviser Financial Engines just made a free Social Security planner available on its site.
The new Social Security benefit calculators are especially useful for those who have tied the knot at some point. Marriage vastly increases the number of variables in the filing decision, and simple Social Security calculators aren’t designed for much complexity. It gets dicier still for those with special cases, such as couples separated widely by age, or spouses of government employees who haven’t paid into Social Security. Taking all this into account, as well as data on income and savings, the new tools guide users through the options in what the companies say is a more advanced, comprehensive approach.
For those who have never been married, the strategy is simple: If you can afford to wait until 70, do it. At 62, single retirees get 75 percent of the benefit they would get at the current full retirement age of 66. By filing at age 70, they bank 32 percent more than that full benefit. That can be the difference between a monthly check of barely above $1,100 versus a check of almost $2,000, a gap of 76 percent.
For married folks, widowers, and those whose previous marriages lasted more than a decade, the obvious choice is usually to claim a portion of their spouse or ex-spouse’s benefits. Often this is free money they can take before age 70 without eroding their own eventual monthly benefit.
One of the options that makes the most sense can be a tough sell. A good strategy is to spend large portions of money saved in retirement plans in your 60s if it lets you lock in a higher benefit later. Financial Engines calculates that every dollar spent deferring Social Security can mean $2 more in a monthly Social Security check. But Financial Engines Chief Investment Officer Christopher Jones says people are “fairly reluctant” to spend that 401(k) balance.
That’s why the tools from Financial Engines and Nationwide Financial also suggest other strategies, such as having one member of a couple -- almost always the one who’s earned the least -- file early while the other waits until 70. While this won’t necessarily milk the most money from Social Security over time, it does provide some cash flow until the full benefits arrive.
Getting the math right in your 60s can be the difference between poverty and prosperity in your 90s. A 62-year-old married couple faces a one-in-four chance that at least one of them lives to age 96. After nest eggs have been depleted, these survivors are stuck living on one Social Security check. Because the survivor benefit is the highest of the couple’s two benefits, it’s crucial that it be as large as possible.