Waiting until age 70 to collect the maximum amount of Social Security may not be the best strategy for couples who want to retire early, according to Christine Fahlund, senior financial planner at T. Rowe Price.
Financial advisors frequently tell clients to wait as long as possible to collect Social Security because benefits increase by 8 percent a year for each year payments are delayed beyond age 66.
At the same time, almost 70 percent of Americans are taking benefits at age 62 – the earliest time possible. This strategy reduces benefits for life. Only 5 percent wait until age 70.
Fahlund says there is a third choice that can be as financially and emotionally beneficial to couples as either of the above two options.
“A lot of people realize they should wait until age 70 to retire and take benefits, but they say that is not for them. They want to retire early,” she says. “There is a third option we call the split strategy.”
Under this option, the person who earns less retires at age 62. [For simplicity, the example assumes the wife is the lower wage earner.] The higher wage earner waits until he reaches full retirement age of 66, but instead of filing for his own benefits, he files for spousal benefits under his wife’s earnings record. Typically he will receive half of what his spouse is receiving.
While he is receiving spousal benefits, he lets his benefit continue to increase at 8 percent a year until he reaches age 70. He then switches to his own benefit and receives the highest amount possible.
This not only helps the couple while they are both receiving benefits, but also helps the survivor after one partner dies. Assuming the wife lives longer, she can then switch from her lower benefit to survivor benefits, which in most cases will be equal to her husband’s higher benefit amount.
If the couple wants to retire in their 60s, but delays receiving benefits until age 70, they will have to dip into their portfolio and savings until they start receiving benefits. The split strategy gives them an income from Social Security and reduces the amount that has to be taken from their portfolio or delays when they have to start taking money from the portfolio, allowing it to continue to grow.
“It is important to focus on the front end (by delaying dipping into savings),” says Fahlund. At the same time, you are “making sure whoever survives gets the highest possible benefit from Social Security for the rest of his or her life. You want to optimize for the survivor.”
The mantra from advisors always has been that the client should wait until age 70 to receive the maximum amount in Social Security, Fahlund says. But her research shows that this may not be the best strategy for a couple.
“You need to consider this as part of a larger strategy. It’s not only about taking Social Security. It is also about taking withdrawals and what year you take withdrawals. An advisor can control, with the clients, the actual year the clients begin taking withdrawals.” If the couple wants to retire early, they “better have some Social Security or they are going to have to withdraw from savings and that is not healthy.”
Fahlund gives the following example to illustrate the three possibilities. Ben was born in 1951, makes $98,000 a year and wants to retire at age 62. Sally was born in 1954, makes $68,000 and wants to retire at age 59. He is assumed to die at age 83 and she at 95. They want an income of $124,000 a year during retirement.
If they claim benefits early, total Social Security income over their lifetime will be $1.1 million and withdrawals from their portfolio will be $3.4 million.
If they use either of the other two options, waiting until they are 70 or using the split strategy, the total from Social Security will be $1.5 million and from portfolio withdrawals $3 million. The delaying strategy allows them to wait to withdraw from the portfolio.