Optimizing Social Security

When we talk about optimizing social security, most people try to maximize their total return. However, unless you have so much money that you will never need the social security money, looking at social security in terms of your lifestyle is much more important. But, before we get to that, let’s go over the numbers just so we know what we are working with.

How Social Security is Calculated

Your social security benefit is calculated based on your age when you start claiming benefits and your highest 35 years of adjusted earnings. Your earnings each year are adjusted based on an index factor that looks at the growth of the average wage in America. The full social security retirement age is currently 66 but is gradually rising to 67. At this age, you are able to collect the full benefit which is calculated by averaging your highest 35 adjusted earnings years. From that number, you will get 90% of the first $895, 35% of earnings between $895 and $5,397, and 15% of earnings above $5,397. For example, I listed the benefit for 3 different average monthly earnings.

Avg. Earnings Calculation Benefit
$500 $500 * 0.9 = $450
$3,500 $895 * 0.9 + ($3,500 – $895) * 0.35 = $1,639.10*
$6,000 $895 * 0.9 + ($5,397 – $895) * 0.35 + ($6,000 – $5,397) * 0.15 = $2,336.60*

*round to nearest dime

The next factor to consider is the age at which you claim. Each year you wait past your normal retirement age, you will get an 8% increase in your monthly benefit. If we use the $6,000 earnings case with a benefit of $2,336.60 we get the following.

 

Age Benefit
62 $1,732.80
63 $1,871.40
64 $2,021.20
65 $2,182.80
66 $2,336.60
67 $2,523.50
68 $2,725.40
69 $2,943.40
70 $3,178.90

 

What Age To File – The Numbers

The optimal age to start collecting depends on the investment returns you expect to get and your life expectancy. Following is a spreadsheet comparing the total returns of different benefit claiming ages. This spreadsheet assumes just under 5.7% returns which were calculated by weighting reasonable expected returns of the assets to my parents target asset allocation of 65% equities 35% bonds. Higher returns will increase the age where waiting to file pays off while lower returns will reduce the age that waiting breaks even.

 

File Age
Age 62 63 64 65 66 67 68 69 70
63 20794 0 0 0 0 0 0 0 0
64 42770 22457 0 0 0 0 0 0 0
65 65995 46191 24254 0 0 0 0 0 0
66 90541 71275 49887 26194 0 0 0 0 0
67 116482 97784 76976 53877 28039 0 0 0 0
68 143897 125800 105606 83135 57672 30282 0 0 0
69 172872 155409 135864 114055 88990 62286 32705 0 0
70 203493 186701 167842 146733 122088 96109 67269 35321 0
71 235856 219773 201637 181269 157068 131855 103798 72650 38147
72 270058 254724 237354 217768 194036 169633 142404 112102 78462
73 306204 291662 275102 256343 233106 209559 183204 153796 121070
74 break down 314995 297110 274397 251755 226324 197860 166099
75 384779 371958 357157 340195 318036 296349 271895 244430 213689
76 427447 415561 401715 385729 364155 343479 320057 293647 263984
77 472542 461643 448806 433852 412897 393288 370957 345662 317139
78 520199 510345 498575 484711 464409 445929 424751 400634 373315
79 570567 561815 551173 538461 518850 501562 481603 458731 432685
80 623797 616212 606761 595266 576385 560358 541687 520131 495430
81 680054 673701 665509 655301 637192 622496 605186 585022 561742
82 739509 734458 727597 718750 701456 688167 672296 653601 631823
83 802343 798669 793215 785805 769372 757572 743221 726080 705889
84 868750 866531 862563 856672 841150 830922 818178 802679 784166
85 938933 938250 935853 931568 917009 908442 897396 883632 866893
86 1013105 1014047 1013310 1010722 997180 990369 981118 969188 954323
87 1091493 1094153 1095171 1094375 1081909 1076954 1069599 1059607 1046723
88 1174339 1178813 1181685 1182785 1171454 1168461 1163110 1155167 1144376
89 1261894 1268286 1273118 1276220 1266090 1265170 1261938 1256159 1247580
90 1354426 1362845 1369749 1374967 1366107 1367378 1366384 1362893 1356652
91 1452219 1462780 1471873 1479328 1471809 1475395 1476768 1475695 1471925
92 1555571 1568396 1579803 1589622 1583520 1589554 1593427 1594909 1593750
93 1664799 1680017 1693868 1706187 1701583 1710202 1716718 1720901 1722502
94 1780237 1797983 1814418 1829378 1826357 1837709 1847018 1854055 1858573
95 1902237 1922656 1941822 1959572 1958224 1972465 1984726 1994780 2002380
96 2031173 2054416 2076468 2097168 2097588 2114882 2130262 2143504 2154362
97 2167439 2193667 2218770 2242586 2244875 2265395 2284072 2300683 2314984
98 2311452 2340834 2369160 2396271 2400535 2424465 2446627 2466798 2484738
99 2463652 2496368 2528101 2558693 2565045 2592578 2618422 2642357 2664142
100 2624504 2660744 2696077 2730349 2738907 2770248 2799984 2827896 2853745
101 2794501 2834464 2873603 2911764 2922653 2958019 2991868 3023983 3054128
102 2974162 3018061 3061222 3103492 3116845 3156465 3194661 3231218 3265902

The current life expectancy for people that are 62 years old is 84 years old. As you can see given these assumptions claiming as early as possible will yield the highest total returns for the average person. This is contrary to the typical advice of waiting as long as possible. You will need to live to age 93 in order for waiting until age 70 to start benefits to be the best option. This is 9 years past the average lifespan at age 62.

What Age To File – Lifestyle

Claiming social security benefits is one instance where it is important to consider more than the numbers. To do this, I will break down 3 different circumstances. You will have different considerations if you need the money to survive now, if your finances are indestructible, or if your finances are fragile to disasters.

Needs Money To Survive Now

If you are unable to get enough money to survive without claiming your social security benefit, you do not have a choice. No other considerations are necessary, you will need to claim your benefit now.

Indestructible Finances

You are so wealthy that even the great depression would not have affected your lifestyle. In this case, you will want to go with the numbers to maximize your total return. If you are healthy and think you will live past 93 you will wait until 70 before collecting. If you think you can get better investment returns or that you will die earlier, you will want to collect as soon as possible.

Fragile Finances

This is the group that is most interesting because their best option goes against the numbers. The reason is that if you are in this group, you have enough money to support your lifestyle now, but it is fragile to economic turmoil that can do significant damage to your nest egg. You have the option to claim right away and enjoy a minor increase marginal utility. Maybe you buy a slightly fancier car, or live in a slightly bigger house, but nothing that will dramatically improve your happiness. However, if your nest egg is destroyed in a depression style crash, you will need to drastically cut your lifestyle and may even jeopardize retirement at an age you are unlikely to want to or be capable of working.

Now if instead, you wait to claim your benefit, you still get to keep your current lifestyle without those slightly nicer comforts, but if an economic disaster occurs, you will be able to claim a much higher monthly benefit that supports a much higher lifestyle than your twin that claimed early. The downturn will affect you less both in absolute and relative terms. The reason waiting is better isn’t because you will make more money, it is because it mitigates your downside risk which has a much bigger impact on your life than the potential upside of claiming early.

What are your plans for claiming social security? Why?

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