Social Security Timing: What Couples Should Consider — The Advisor and the Quant

In this series, we provide our readers with two distinct perspectives on the same topic — one from an academic, the other from a practicing financial advisor.

If you have a question or two, please send them to us.

Check out the previous column here.

QUESTION: How should a married couple decide when to claim Social Security?

THE ADVISOR — JOE ELSASSER, CFP, PRESIDENT, COVISUM:

Over the last several years, most advisors have learned that there is more to a Social Security claiming decision than meets the eye. The simple rule that most consumers follow is this: “If I expect to live a long time, I should delay my Social Security benefits. If not, I should take them as soon as possible.”

Smart advisors have realized that the “I” in how married couples think about the question is the root of the problem. When couples replace the “I” with “either of us” and “our,” they arrive at a different answer.

Consider John and Jane Smith. John is currently 62 and Jane is 60. Both held higher paying jobs throughout their lifetimes, such that John’s projected Social Security benefit at full retirement age (FRA) of 66 and 4 months is $2,600. Jane’s projected benefit at her FRA of 66 and 8 months is $1,800. Assuming they live to 90 and 94 years respectively, the difference in value between claiming early versus both delaying to age 70 is over $250,000 in favor of delay. Simply quantifying the number (in an academically sound way) is enough for most couples to take notice.

There are two drivers for the dramatic value difference. The first is the value of the increases in monthly benefits. Both benefits will increase by over 75% by virtue of delaying from 62 to 70. Second, and most importantly, is the value of the survivor benefit. Because John’s benefit is larger, it will continue to be paid for as long as either John or Jane is alive. In other words, delaying John’s benefit is like a joint and survivor pension option. Think of it this way – if your client was given a choice between a life-only pension and a joint life pension in the same monthly amount at work, they would almost always take the joint life payout. Each month of John’s delay is like being able to buy a little bit of extra joint life pension for a single life pension price. That’s a pretty incredible deal.

For a joint life pension the entire decision is about “we,” not “I”. Orienting a Social Security decision in the same way and quantifying together the value of the various election options over a joint lifetime will help clients avoid the framing issue and allow them to make the decision that is best for the household overall.

For most clients, identifying the optimal solution “in a vacuum” and without regard to the rest of the financial plan is the first step to quantifying the value of the decision and understanding its importance. From there, advisors need to check the cash flow “fit” with other retirement assets and income streams in light of tax, liquidity and risk considerations. If there’s a mismatch, the advisor should identify alternate strategies that provide a better fit and explore the trade-off in terms of lifetime, household value.

Notice in the example above, these clients are too young to use the “file and suspend” and the “restricted application for spousal benefits” that have been the center of the conversation over the last several years. Even so, the difference between a good Social Security claiming decision and a poor one will continue to be worth tens, if not hundreds of thousands of dollars in lifetime value and a critical component of any strong planning process.