The majority of Americans depend on two main sources of retirement income: their investment portfolio and their social security benefits. (Company pensions are mostly a relic of the past except for public sector professionals and a lucky few others). It’s no wonder then that the financial stability of this popular and important program is politically sacrosanct or that it receives so much media attention.

And yet, so many Americans, (particularly those who rely most on the benefits), don’t have a good framework for making the optimal claiming strategy. The difference between a good social security claiming strategy and a bad one can easily exceed $100,000 in cumulative lifetime benefits.

Most claim Social Security benefits too early

Many individuals claim benefits early out of fear that the system is broken, and they want to get what they can before it goes broke. There’s some emotional logic to this along with some real concerns. Actuarial projections show the Social Security trust fund will only be able to pay full retiree benefits through 2033 without further interventions (see Summary: Actuarial Status of the Social Security Trust Funds (ssa.gov)).

However, failure to consider the full picture and range of claiming strategies is likely the bigger risk, especially for those who are nearest to claiming benefits and those who will rely most on their benefit. Every recent change to Social Security has grandfathered those folks who are already (or soon to be) receiving benefits. Which is not to say that precedents cannot be broken, but it would be political suicide for either party to support a plan that moves the goal posts on anyone near the goal line. Of course there will be changes down the road, but many individuals and families have already left money on the table by claiming too soon.

For many retirees, their Social Security benefit is their largest financial asset. For a married couple, cumulative lifetime benefits can easily exceed $1,000,000. For the vast majority of American families, this greatly exceeds their other retirement assets. Mismanaging the social security claiming decision can materially lower their standard of living in retirement and increase the likelihood of running through their savings prematurely. Even for wealthier individuals, Social Security income provides a stabilizing force, ensuring they can maintain their lifestyle and protecting against adverse outcomes.

If you are already nearing age 62 or older, there’s good reason to have confidence that the current structure will not change for you.

How to evaluate a Social Security claiming strategy

Explaining the nuances of this complicated system is more than can be addressed in a single blog post (or even a series), however I hope to illustrate some basic principles that will help you to make an informed decision. With all financial planning endeavors, it always helps to begin with the goal in mind.

For most people there are two main objectives when evaluating claiming strategies:

1. Maximizing cumulative lifetime benefits (adjusted for inflation)

2. Reducing longevity risk (i.e. the chance you or your spouse will outlive your savings)

These two objectives are often aligned with one another; by maximizing the former, you are often minimizing the risk of the latter. Still, reasonable people can place differing weights of importance on each, and when viewed within the context of all the uncertainties (chiefly life expectancy and future investment returns), there can be more than one reasonable answer.

First, let’s define some important terms.

Social Security Terms to Know

Full Retirement Age (FRA):

Also known as “normal retirement age,” your FRA is the age at which you receive your Primary Insurance Amount (PIA) as your benefit. People who claim before their FRA receive a reduced benefit while those who delay their benefits beyond FRA receive a higher amount. Your FRA is determined by your birth year according to the first two columns of the table below. Individuals born in 1954 or earlier have a FRA of 66. Those born in 1960 or later have an FRA of 67. Birth years of 1955 to 1959 fall evenly in between.

FRA also impacts the Social Security Earnings Test. If a person claims benefits prior to attaining their FRA, their benefit may be reduced if they continue to work and earn income beyond certain thresholds. If benefits are claimed prior to FRA, they are reduced by $1 for every $2 an individual earns above $22,320 (2024 limit). Benefits are reduced $1 for every $3 above $59,520 for earnings in the same year person attains their FRA (and only earnings in those months prior to attaining FRA count). The earnings test does not apply once you reach your FRA.

Primary Insurance Amount (PIA):

Your PIA is the level of monthly benefits you would receive at your Full Retirement Age. If you claim before or after your FRA, your benefit will be adjusted based on a percentage of your PIA (see the table above). It’s important to note that your benefits increase by a fraction of a percent each month you delay benefits from age 62 (the earliest you can claim benefits) until you reach 100% of PIA at your full retirement age and your maximum benefit at age 70. This means, you do not need to wait 12 months to receive a step up in benefits, they increase ratably every month.

If you have not begun benefits yet, your PIA is only an estimate at this point. You can obtain your estimate at https://www.ssa.gov/prepare/get-benefits-estimate.

The PIA for each person is based on detailed calculations of their Average Indexed Monthly Earnings (AIME) for the 35 years of highest earnings, where earnings before age 60 are indexed to reflect increases in U.S. worker’s average wage level. For example, if the average wage level in the U.S. is twice as high when an individual is 60 as when she was 40, the formula doubles their age-40 earnings.

Your AIME is converted to your PIA based on another formula that ensures benefits replace a higher percentage of earned income at lower income levels. In this way, the Social Security system is a progressive benefit. Social Security payments may replace 60% of pre-retirement income for someone who earned minimum wage, but only 28% of income for someone earning the maximum income subject to social security taxes ($168.6k in 2024). For someone who averaged twice the income subject to Social Security taxes, benefits would only replace 14% of their pre-retirement income. All earned income above the Social Security Wage Base is not subject to social security tax and is not used in calculating benefits. If your earnings history is less than 35 years, a zero is included for each missing year.

Cost of Living Adjustments (COLA):

All benefit amounts, including an individual’s PIA, are adjusted annually for inflation. For example, 2024 benefit amounts were increased by 3.2% over 2023, which were increased 8.7% over amount in 2022 due to our recent bout of post pandemic inflation. The COLA ensures that Social Security benefits maintain their purchasing power year over year with inflation. The COLA is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as determined by the Bureau of Labor Statistics in the Department of Labor.

Claiming Strategies for Individuals

Before looking at more complicated scenarios involving couples, it’s instructive to understand how to optimize benefits for a single individual. Remember, we’re concerned with both maximizing cumulative lifetime benefits and reducing the likelihood of running out of savings (aka, longevity risk) and the lessons here are still instructive for couples.

Lesson 1: If a single individual lives to about age 81, the cumulative lifetime benefits are approximately the same no matter when they began benefits (whether at age 62, 63, 64… or any age through 70)

This s no accident. The actuaries at the SSA designed the benefit reduction and delayed credit amounts to be actuarily fair. If we assume an individual has an average life expectancy of around 81, then it shouldn’t matter when this person begin benefits. They could start benefits at 62 and receive a fully reduced benefit for 19 years or delay to 70 and receive maximum benefits for only 11 years (or any time in-between) and they’ll just about break even.

This naturally leads to the second take away.

Lesson 2:

• Singles who expect to live well beyond age 81 should probably delay the start of benefits to age 70.

• Singles who are confident they will die well before 81 will probably want to begin benefits as soon as possible.

• Singles who expect to live to about 81, but are concerned about living longer, should probably wait until age 70 to claim.

This is painting with a broad brush. There are other break-even points between claiming ages 62 and 70 based on different life expectancies up to age 81, but most of us do not get to know our life expectancy with any specificity.

It’s also worth emphasizing again that maximizing cumulative benefits is not the only important criteria; we are also trying to reduce longevity risk. To accurately gauge this risk, we also have to consider your other sources of retirement income and what impact your claiming strategy will have on your portfolio withdrawal strategy.

Regardless, the data is pretty clear that delaying the start of Social Security benefits can extend a portfolio’s longevity for almost any level of wealth (and longer for smaller portfolios).

It can be reasonable to delay benefits to age 70 even if you don’t expect to live well into your 80s, if there’s a chance that you could.

Of course, if you’re not single, you’ve got more than just your own life to consider, which brings us to the next section.

Claiming Strategies for Couples

The rules and the analysis get significantly more complicated when considering strategies for married couples. The passage of the Bipartisan Budget Act of 2015 changed the face of Social Security with the stroke of a pen. Among other things, this new law limited some of the claiming strategies previously available to couples, specifically the “file and suspend” and filing “restricted application.”

Yet, even with reduced options, it’s still imperative that couples understand the implications of spousal benefits and survivor benefits when evaluating claiming strategies.

Spousal Benefits

Spousal benefits are additional benefits the wife may receive based upon the husband’s earnings history while the husband is still alive. The rules are not gender based and would apply the same in reverse if the wife were the higher earner, but for clarity I’ll just refer to gendered language and traditional dynamics where the husband was the higher earner. In many families, including my own, this dynamic is reversed.

Generally, a spouse is entitled to receive the higher of her own benefit (based on her own earnings history) or 1/2 of her husband’s benefit (up to a max of 1/2 of his PIA) if she claims at her FRA. Following the 2015 Bipartisan Budget Act, the husband must have already filed and receive his own benefit for the wife to be eligible for spousal benefits. Before the act, the husband could file and then suspend his benefit, enabling his wife to file for spousal benefits while his benefit continued to grow (this was known as “file and suspend” and was only available for individuals born on or before April 30, 1950). Prior to the 2015 Act, married individuals could also file a “restricted application” to receive only their spousal benefits while letting their own benefit continue to grow. If you were born after January 1, 1954, any filing for benefits is automatically deemed to be for both types (i.e. those based on your own earnings and spousal benefits).

Survivor Benefits

Also known as widow or widower benefits, Survivor Benefits are available to a wife once her husband passes away. For clarity again, I will present survivor benefits as if the husband dies and was the higher earner, but the rules are parallel. Yet again, there are different FRAs and reduction percentages for survivor benefits, which can begin as young as age 60 at a reduced rate.

Basically, the survivor is entitled to the larger of her own benefit based on her own earnings record or her survivor benefits based on his. It gets more complicated based on when/if the husband began receiving benefits and his age when he passed away, but for simplicity, we’re not going to get into that here. However, it’s critical to mention that the surviving spouse may apply for survivor benefits when eligible, while delaying application for her own benefits until later, thus allowing her own benefit to grow. This type of “restricted filing” was not altered by the 2015 Budget Act.

As you can already tell, the planning opportunities for couples are far more complicated than for a single person, but that also means there’s potentially more value in good planning. We’ve now got to factor in the relative ages and life expectancies, and relative PIAs of each spouse when selecting the best strategy.

Most couples are rightfully concerned not just with maximizing their own benefit over their own lifetime, but maximizing their combined benefits and ensuring the surviving spouse does not outlive their assets after the first spouse passes away.

It’s not possible to get into the complexities and keep your attention (if I haven’t already lost it), but there are a few key take aways that should be understood in conjunction with the lessons from the singles section before:

Lesson 3: The spouse with the higher PIA should begin his or her benefits based primarily (if not entirely) on the life expectancy of the second spouse to die.

If you think about it, the higher earning spouse’s benefit will apply until the second spouse dies. It actually doesn’t matter who passes away first since the surviving spouse will receive the higher of the two benefit amounts and the lower benefit will fall away. Therefore, what matters most when determining when the higher earning spouse should apply for benefits is not his own life expectancy, but the life expectancy of the longer-lived spouse. Even if the higher earner is diagnosed with a terminal illness at age 67, it probably still makes sense for him to wait to claim his benefit if the surviving spouse is likely to outlive him by more than a decade.

Lesson 4: If at least one spouse lives well beyond the year that the higher earner turns 81, most couples’ cumulative lifetime benefits will be highest if the higher earner delays benefits based on his or her record until age 70.

This point follows from the earlier takeaway. Most couples will maximize lifetime benefits if the higher earner delays until 70, however the break-even points vary depending upon the ratio of the lower PIA to the higher PIA. Where this ratio is greater than 0.5, the lower earning spouse would not receive any spousal benefit because her own benefit is already higher than half of her husbands. It will likely make sense in this case for the husband to delay filing until age 70.

Where the ratio of PIA’s is lower than 0.5, meaning the wife would qualify for additional spousal benefits on top of her own benefit once the husband files, the breakeven age is pushed outward. Pushed to the case where the wife did not work at all and the ratio of their PIAs is 0.0, this is easy to see. By delaying filing, the higher earning spouse is not only forgoing the benefits he could have received before age 70, but also the spousal benefit that his wife could have collected for those years too. In this case, the breakeven for delaying benefits all the way to age 70 may be where at least one spouse lives beyond the year when the higher earner would have turned about 90. However, if the lower earning spouse is more than about 3 years younger, then the spousal benefits are less of a factor in the decision process (or not a factor at all if significantly younger), making it all the more beneficial for the higher earner to delay.

What about the lower earning spouse?

A general rule of thumb is that the lower earning spouse should make their decision of when to claim based upon the age he or she would be when the first spouse passes away. Here again, it doesn’t matter which spouse dies first: either way, the survivor will retain the higher benefit, and the lower benefit will cease.

This is a weaker rule with more exceptions, but it tends to make an earlier filing age for the lower earning spouse more beneficial because there will be more years when the couple will receive both of their benefits.

Tell me when you’ll die, and I’ll tell you the best strategy…

Most of us don’t get to know this information with any certainty, so we’ve got to weigh the options and balance the competing objectives of maximizing expected cumulative benefits and minimizing longevity risk.

Furthermore, thinking or talking about this subject feels morbid. It can be tough for individuals or couples to want to wrestle with it. We would rather focus our attention on the (real, but not insurmountable) problems with the Social Security system rather than our own mortality.

That’s why it can be helpful to have a financial advisor who understands the complexities of the Social Security system and the strategies for optimizing benefits, both of which will change over time. It’s also important to consider your claiming strategy in light of your overall financial plan. Coordinating your Social Security strategy with other planning opportunities like Roth conversions and tax efficient withdrawal strategies is also important. A good advisor will help you weigh the options and make objective decisions that reflect your goals.

Hopefully this (long) post gives you a framework for understanding the basics of the Social Security system and the contours of claiming strategies.

I’m heavily indebted to William Reichenstein and William Meyer’s 2017 book, Social Security Strategies: How to Optimize Retirement Benefits (3rd Edition). All of these lessons come straight from this excellent book, which is aimed at helping financial advisors provide Social Security planning into their clients.