Claiming Social Security at Full Retirement Age is Often a Mistake

SSA-image-2My Comments: The headline above should probably read ‘Sometimes’ instead of ‘Often’. It depends to some extent on when you die.

Since that date is completely unknown, the only solution is to play the odds, and my recommendation these days is to assume you will live to be 100. That’s the conservative approach.

Unless you plan to die soon, you’ve going to need money from somewhere, and for many of us, our Social Security payments will make up the bulk of our retirement income. So it might make sense to spend down what little you’ve saved and then rely on a larger check from Social Security when you reach age 70.

Mike Piper June 13, 2016

Imagine for a moment that I am an insurance company, and you are a married retiree. And, as an insurance company, I offer to sell you either (or both) of two annuities:
• With Annuity A, for every $100 of the annuity you purchase, I promise to pay you $7 per year for as long as you or your spouse is alive.
• With Annuity B, for every $100 of the annuity you purchase, I promise to pay you $7 per year for as long as both you and your spouse are still alive.

But I will only sell you, at most, $10,000 of either annuity.

There would be a number of reasonable decisions you could make here. You might purchase $10,000 of each annuity. Or you might purchase neither. Or you might purchase $10,000 of Annuity A and $2,000 of Annuity B. And so on.

But you wouldn’t, for instance, purchase $10,000 of Annuity B and $2,000 of Annuity A. Nor would you purchase $5,000 of each. And that’s because Annuity B is worse than Annuity A.

In short, you wouldn’t spend a dime on Annuity B unless you had already purchased the maximum amount of Annuity A and you still wanted to purchase more annuities.

What Does This Have to Do with Retirement Planning?

In our hypothetical example above, Annuity A is essentially what you get when the higher earner in a married couple delays claiming his/her Social Security retirement benefit. And Annuity B is what you get when the lower earner in a married couple delays claiming benefits. The percentages are slightly off, but the concept is the same — delaying the benefit of the spouse with the higher primary insurance amount increases the amount the couple receives as long as either spouse is still alive, while delaying the low-PIA spouse’s benefit increases the amount the couple receives while both spouses are alive.

In our example above, it doesn’t make sense to buy any of Annuity B unless you’re already buying the maximum amount of Annuity A. And, with Social Security, the low-PIA spouse shouldn’t be doing any waiting unless the high-PIA spouse is already planning to wait until 70.

Unfortunately, it’s common to see couples in which both spouses start taking Social Security at full retirement age (or close to it), despite the fact that there would have been a strictly-superior strategy available to them.

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