Social Security for Couples – It’s Complicated

Welcome back to Retirement Hangout!  I recently turned 66 – Full Retirement Age for receiving Social Security retirement benefits.  Inspired by this milestone, I decided to check out several free social security calculators even though I plan to defer benefits until I’m 70.  Today’s post explores some of the thought-provoking results I found.

As we all know, a successful relationship requires hard work; it turns out that this includes financial decision-making about when to take social security.  Couples need to coordinate their social security retirement benefits to optimize their joint financial welfare.  Exactly how they do this and what they decide will vary according to each couple’s circumstances, health, aversion to risk and even their birthdays!  Read on…

The problem: how to generate reliable income from a pot of retirement savings

Today’s (and tomorrow’s) retirees face the challenge of how best to generate a reliable stream of income – increasingly, without a traditional pension.  According to the Bureau of Labor Statistics, only 22% of all workers (mostly employed in the public sector) participate in defined benefit retirement plans; another 42% participate in a defined contribution plan, such as a 401(k).  How should people facing a potentially multi-decade retirement manage their nest eggs, often consisting of “pots” of investments in IRAs, 401(k)s and the like, so as to provide for both long-term growth and a steady income? 

Deferral makes good sense – for at least one half of a couple

Several of my previous posts discussed the retirement income issue.  One of my stronger conclusions was that most people will benefit from deferring taking social security until age 70.  I am by no means alone in this observation; the vast majority of retirement financial planners agree.  Deferring Social Security is the best deal out there on a lifetime annuity: each year’s delay buys you additional annuity income, indexed for inflation and guaranteed by the Federal government, at an unheard-of 8% payout rate.  What’s more, it’s a “joint and survivor” annuity that keeps paying as long as either spouse is alive.  For all these reasons, the higher-earning partner in a couple should generally defer taking Social Security until 70, if their finances allow.  Notwithstanding the uncertainty surrounding long-term Social Security funding, this is pretty much a slam-dunk decision.

“Deferring Social Security is the best deal out there on a lifetime annuity”

What should the other half do?

But what about the other partner, the one with lower lifetime earnings?  Some couples will simply need the income, in which case a very reasonable strategy is to defer the higher earner’s benefits until age 70 while going ahead and taking the other partner’s benefits earlier, at Full Retirement Age (FRA) or even earlier. 

What if a couple has sufficient resources to allow the second earner to defer also?  Which is the smarter strategy – deferring to 70, taking Social Security at Full Retirement Age (currently 66, moving to 67), or taking benefits early (you can take reduced benefits as early as age 62)? The best decision here is not so clear-cut and will depend on a couple’s circumstances and temperament, i.e., how conservative or risk-averse they are.   In my research, I was surprised to see that several sites devoted to optimizing social security recommended that I should defer taking Social Security benefits until I’m 70 (I’m the higher lifetime earner in my family), but that my wife should start taking her benefits immediately, even before reaching her Full Retirement Age.  I had pretty much convinced myself that we should both defer until age 70, thereby maximizing our lifetime annuities, and draw down other retirement savings in the meantime.  Hmm… was I guilty of drinking my own Kool-Aid?  What was going on here?

Digging a little deeper: some examples

Let’s examine a specific case.  Consider the following couple:

• Both born in January 1954, no longer working
• Higher earner’s SS benefit at FRA:  $2500/month ($30,000/year)
• Lower earner’s SS benefit at FRA:   $1500/month ($18,000/year)

Plugging these assumptions into Mike Piper’s excellent Open Social Security calculator at the Oblivious Investor website, we get back a recommendation that expected benefits would be maximized by having the lower earner claim immediately (even before Full Retirement Age, which would be 2020), while the higher earner waits until 70 to claim benefits.  Following this strategy, this couple would receive the following benefits:

Case 1: Lower Earner Claims Early, Higher Earner Defers

Year(s)	Higher Earner Benefit	Lower Earner Benefit	Yearly Total
2019-2023	0	$17,100 *	$17,100
2024 and Beyond	$39,600	$17,100	$56,700
After One Spouse Dies	$39,600	0	$39,600

*Partial benefit of $12,900 in 2019, which begins in April

The higher earner gets a significant boost (almost $10,000 per year more) by waiting until 70.  The lower earner receives a slightly reduced check (about $1,000 less than the FRA amount) as a penalty  for starting benefits nine months early.  The total expected stream of benefits (in today’s dollars, assuming typical life expectancies) is $977,835.

What if this couple instead decided that both would defer collecting benefits until they were 70?  In that case their annual benefits would be as follows:

Case 2: Both Defer Social Security Retirement Claim

Year(s)	Higher Earner Benefit	Lower Earner Benefit	Yearly Total
2019-2023	0	0	0
2024 and Beyond	$39,600	$23,760	$63,360
After One Spouse Dies	$39,600		$39,600

This example makes the trade-off clear.  Deferring raises the couple’s annual annuity by almost $7,000, but at the cost of forgoing $17,000 of income for almost five years.  The benefit of the increased annuity disappears after one spouse dies, because the surviving spouse will collect whichever benefit is larger – the higher earner’s benefit. 

Which of these options is better depends on how long the couple lives.  Using typical life expectancies, the calculator comes up with a total expected benefit stream of $963,730 for the deferral strategy – $14,000 less than the preferred strategy. 

To my mind, these results are only trivially different, so you could reasonably choose either one.  But you might as well take the strategy that promises the higher expected return, right?  Not necessarily.  Your expected, or most likely, return is not the only way to look at this choice.  Another valid perspective is how much you value the certainty of income in your old age – sometimes called longevity insurance.  You might consider $14,000 a small price to pay for the confidence that you’ll have higher income in your 70s and beyond without having to worry about returns on stocks and bonds.  Keep in mind, though, that this income, unlike the higher earner’s annuity, only lasts until the first partner in a couple dies – so it’s more like a single life annuity.  But an inflation indexed, Federally guaranteed single life annuity with an 8% payout is still a pretty good deal.

“Your expected, or most likely, return is not the only way to look at this choice.  Another valid perspective is how much you value the certainty of income in your old age…”

Another consideration is your health – if one of you is in poor enough health that he or she doesn’t expect to live a long life, it may make sense to claim early.  On the other hand, if you’re both in good health, the deferral strategy may pay off.  If both partners live into their mid-80s or beyond, their lifetime income will be greater if they both defer. (The “break-even” age in this example is 82.)

Your birthday matters, too

There’s one additional wrinkle to consider: the year you were born.  If one or both members of a couple were born in 1953 or before, you are grandfathered in under an older rule that allows you to file a “restricted application” for spousal benefits, even as you let your own benefit grow until age 70.  To do this, the spouse in question must already be collecting his or her benefit, and the spousal benefit claimant must be at Full Retirement Age.  If the couple in the examples above was born in December 1953 instead of January 1954, this option would be available to them.  Here’s what this strategy would look like for them:

Case 3: Lower Earner Claims Early, Higher Earner Files Restricted Application/Defers Own SS to 70 (!)

Year(s)	Higher Earner Benefit	Lower Earner Benefit	Yearly Total
2019	0	$12,900	$12,900
2020-2023	$9,000	$17,200	$26,200
2024 and Beyond	$39,600	$17,200	$56,800
After One Spouse Dies	$39,600	0	$39,600

The Open Social Security calculator estimates the expected stream of benefits in this case to be $1,010,378 – $46,000 higher than the deferral strategy (Case #2).   (Also, compare with Case #1 – this couple receives a $32,000 lifetime bonus just for being born a month earlier!) 

The “break-even” age under this scenario is pushed back considerably. You can calculate this yourself — divide the total amount you’d forgo if you both defer by the annual annuity increase you would gain. In this case, the calculation would be [($17,200 x 4.75 years) + ($9,000 x 4 years)] / ($23,760 – $17,200), i.e., 17.9 years, if I’ve done the math correctly. Since the deferred annuity doesn’t start until age 70, you don’t “catch up” with the forgone costs until you’re both 88.

If you were born in 1953 or before, this restricted claim strategy may be attractive.  You should probably anticipate some extra time and energy dealing with the Social Security bureaucracy, since this is a complicated option that is being phased out.  There’s a good possibility that you’ll initially be told you can’t do it, or that you’ll automatically be assigned your own benefit rather than your desired spousal benefit.  But if you’re up for the challenge of tilting at the Social Security windmill, go for it.

 Making Your Social Security Claiming Decision

If you’re in the position of needing to make this decision now or in the not too distant future, what should you do?  First, run the numbers for yourself.  Go to www.socialsecurity.gov and log into your own My Social Security page (create one if you haven’t already).  There you and your partner can forecast your projected social security benefits at different possible claiming ages using Social Security’s actual numbers.   The Social Security site will give you an accurate estimate of what your benefits would be at different claiming ages: 62, Full Retirement Age, and 70.  Take particular note of your PIA (the amount you would expect to receive at your Full Retirement Age). 

The Social Security site will not analyze which strategy is best for you as a couple.  For this, you need to go to an online Social Security calculator.  The Open Social Security calculator at Oblivious Investor (the one I used for the examples above) and the Social Security Retirement Calculator at Financial Engines are both free and easy to use.  There are also numerous web sites, software and financial planners who will be happy to advise you on this subject for a fee – but why not try the do –it-yourself approach first? 

Once you have good estimates of your benefits and potential income under the different claiming strategies, you are in a position to make your own, informed decision.  You could opt for the strategy that gives you the highest expected stream of benefits (often means the lower earner claims earlier), or you might want to play it safe and place a higher value on longevity insurance (claim later and collect the higher annuity). 

Each couple’s circumstances and comfort level will be different.  Poor health, pressing cash flow needs, and a birthday in 1953 or before might edge you toward the earlier claiming strategy; good health and family longevity might tip you in the opposite direction.  If the lower earner’s earnings are way lower (PIA less than half of the higher earner), it will often make sense to claim early; he or she will be able to ramp up to a higher spousal benefit in any case when the higher earner starts collecting benefits, so there’s no penalty for receiving benefits early.

My philosophy is to plan for a financially pessimistic case, which, ironically in this case, is both partners living long (and hopefully healthy) lives – more of a best case, in the larger scheme of things!  Even though I was born in 1953, my wife and I are leaning toward the deferral strategy; it’s less complicated, we’re both in good health, and we like the longevity insurance of having a higher guaranteed income after 70. 

The truth is, there’s no right answer and no way of knowing in advance what the best strategy will be, since it depends on an unknowable — how long both partners will live.  Fortunately, for many couples, most of these claiming strategies yield fairly similar expected lifetime benefits, so, whichever strategy you choose, you’re unlikely to be making a big mistake.  Just make sure the higher earner defers claiming benefits as long as possible!    

References

Financial Engines. (2018). Social Security Retirement Calculator.

Piper, Michael. (2019).  Open Social Security.  Oblivious Investor.

Quinn, Jane Bryant.  (2016).  How to Make Your Money Last.  New York: Simon and Schuster.

U.S. Bureau of Labor Statistics.  (2018, March).  Employee Benefits Survey.  National Compensation Survey.