Social Security’s Windfall Elimination Provision: How to Quickly Calculate Your Penalty

For those of you affected by the Windfall Elimination Provision, finding out how much your Social Security benefits will be reduced is no easy matter. You can ask your local SSA office for help, but it may take you weeks to get an appointment to see a representative. Or, you can use the WEP calculator on the SSA website. However, that calculator requires you to enter your entire Social Security earnings history. Tracking down and entering that information may involve significant time costs for some.

In this post, I offer a quick way to calculate the WEP penalty for those with 20 or fewer years of substantial Social Security earnings. Most people with a government (non-SS) pension probably fall into this category.

Note that the following discussion applies to those turning 62 in 2013. If your year of birth is before or after 1951, the numbers shown below represent for you a close approximation for your WEP penalty.

To determine your WEP penalty, you need to compare three numbers:

1. 55.6% of your full retirement age benefit (from your SS Statement); this is your tentative WEP penalty;
2. \$396; this is one of two limits on your WEP penalty (it changes with each COLA adjustment); and
3. 50% of your non-SS government pension; this is the second limit on your WEP penalty.

Once you have these three numbers, pick the smallest one. That is your WEP penalty: that is, the reduction in your full retirement age (FRA) benefit due to your non-SS government pension.

Here are a couple of  examples. Suppose your FRA monthly benefit is \$800 and your non-SS pension is \$500. The three numbers for finding your WEP penalty are:

1. \$444 (= 55.6% of \$800)
2. \$396
3. \$250 (=50% of \$500)

So, your WEP penalty is \$250, which reduces your FRA SS benefit from \$800 to \$550.

Next, in the above example let’s change the non–SS pension to \$1,000, keeping the FRA benefit at \$800. The three critical numbers are:

1. \$444
2. \$396
3. \$500 (=50% of \$1,000)

In this example, your WEP penalty is \$396, which reduces your FRA benefit from \$800 to \$404.

This WEP-adjusted FRA benefit is the value you would use if you want to calculate either an early claiming penalty or delayed retirement benefits.

It is also the value you would use if you are requesting a custom report from us to help you get the most out of Social Security.

Further Detail

The following table provides information on the WEP penalty for all of the relevant substantial-earnings years (for those turning 62 in 2013). The row for “20-or-fewer” years of substantial earnings shows the penalty values used in the above examples. (Note that “Limit #1” changes whenever SS benefits get a COLA adjustment.)

 Years with Substantial Earnings WEP Penalty Rate WEP  Penalty Limit #1 WEP Penalty Limit #2 20 or fewer 55.6% \$396 50% of pension 21 50.0% \$356 50% of pension 22 44.4% \$316 50% of pension 23 38.9% \$277 50% of pension 24 33.3% \$237 50% of pension 25 27.8% \$198 50% of pension 26 22.2% \$158 50% of pension 27 16.7% \$119 50% of pension 28 11.1% \$79 50% of pension 29 5.6% \$40 50% of pension 30 0.0% \$0 50% of pension

Here is an additional example of how to use the above table. Assume you have 25 years of substantial earnings. Further, suppose your FRA monthly benefit is \$800 and your non-SS pension is \$500. The three numbers for finding your WEP penalty are:

1. \$222 (= 27.8% of \$800)
2. \$198
3. \$250 (=50% of \$500)

So, your WEP penalty is \$198, which reduces your FRA SS benefit from \$800 to \$602.

This WEP-adjusted FRA benefit of \$602 is the value you would use if you want to calculate either an early claiming penalty or delayed retirement benefits.

And, again, it is also the value you would use if you are requesting a custom report from us to help you get the most out of Social Security.

Social Security Benefits and the Time Value of Money

Clients sometimes ask us why we conduct our optimization analyses with discounted dollars (future dollars converted to present-value equivalents), rather than with the actual cash flow of Social Security benefits. After all, they say: “actual cash flows are easy to understand, but ‘discounted’ future dollars is a confusing concept.”

Here is why we discount future dollars: No one believes that \$100 to be received 30 years in the future is worth as much as \$100 to be received immediately. Our approach is consistent with this universal belief and the behavior that stems from it.

We translate future dollars into present value equivalents, using a 3% “real” discount rate (that is, over and above any inflation). This rate implies, for example, that \$100 to be received one-year from now is worth about \$97 today. And, a \$100 to be received 25 years from now is worth about \$49 today. For more discussion on the mechanics of discounting, go here.

Some Social Security optimization programs do not discount; that is, they base their analyses on undiscounted cash flows, treating \$100 30-years from now the same as \$100 today. So, their approach is totally inconsistent with how actual people think and behave. And, the advice coming from these software packages misleads people into thinking that they should claim benefits later than makes sense from a financial perspective. Of course, many people want to claim sooner rather than later, so giving them misleading advice to claim later than makes sense just causes them to ignore the advice that they just paid for.

Here is an illustration of how the undiscounted cash flow approach seriously tilts the advice toward late claiming. Assume that Andy is single. He is now 60 years old. His SS benefit amount at full retirement is \$2,000. His life expectancy is approximately 79.

The naive cash flow analysis suggests that Andy should claim benefits at age 67. In sharp contrast, when we convert future values into present value equivalents with a 3% discount rate, we find that the optimal claiming age for Andy is 62! Discounting really matters, as this example illustrates.

Here is another illustration, for a married couple this time. Let’s use Fred and Ann for our example. Fred was born in 1950, Ann in 1953. His full retirement age benefit is \$2,500; hers is \$1,500. They both have normal expected life spans: 82 for him and 86 for her.

No Discounting

Using the naive cash flow analysis (no discounting*), the optimal strategy that maximizes that cash flow is:

1. Fred files and suspends at 66 in 2016
2. Ann claims spousal at 66 in 2018 (\$1,250/mo)
3. Fred claims retirement at 70 in 2020  (\$3,300/mo)
4. Ann drops spousal and claims retirement at 70 in 2022 (\$1,980/mo)
5. Ann switches to survivor’s benefits in 2033 (\$3,300/mo).

By the time Ann dies at 86, this strategy will have yielded \$1,090,000 in Social Security benefits. (If this time stream of benefits is discounted at 3%, we get a measure of Social Security Wealth equal to \$677,000.)

Our Approach: Discounting at 3 Percent

When we discount future dollars using a 3% discount rate**, we would recommend the following for this couple:

1. Ann claims retirement at 62 in 2014 (\$1,125/mo)
2. Fred claims spousal at 66 in 2016 (\$750/mo)
3. Fred claims retirement at 70 in 2020 (\$3,300/mo)
4. Ann claims survivor’s benefits in 2033 (\$3,300/mo)

By the time Ann dies, this strategy will have yielded \$1,071,000 in Social Security benefits, measured on a cash-flow basis. (Converted to a discounted present value of Social Security Wealth, these recommendations produce \$685,000–more than the no-discounting recommendations previously discussed).

Notice that by discounting at 3%, we place more emphasis on near-term benefits, which yields recommendations for the couple to start claiming four years earlier than does the naive cash flow analysis.

The naive cash flow recommendations offer a \$19,000 advantage over the 24-year time period considered here. But, that approach takes 16 years to gain an advantage over our recommendations, based on discounting at 3%. This point is illustrated in the following graph.

The horizontal axis shows the number of years used in the analysis, from 1 to 25. The vertical axis shows the cumulative losses or gains from following the naive cash flow recommendations versus our recommendations.

By the time the naive cash flow recommendations kick-in (year 5 in the graph), they are already \$89,000 behind our recommended approach. And they don’t gain the advantage for another 11 years (year 17 in the graph). And then the advantage is relatively modest (\$19,000 received when Ann is about 78 and Fred is about 81, very near the end of his expected life span).

So, by emphasizing near-term benefits over distant benefits, our approach leads to optimal recommendations that typically bring Social Security claimants money years earlier than the naive cash flow recommendations. Moreover, our approach is consistent with how people actually think and behave.

_____________________

*In this example, discounting future benefits at any rate below 1.75% leads to the same set of recommendations: claim as late as possible.

**In this example, any discount rate between 2% and 5.5% produces the same recommendations, so there is nothing critical about our 3% discount rate.

Social Security Benefits and the Time Value of Money: An Example

Occasionally, someone asks me for an explanation of the mechanics of discounting future values to get present value equivalents. In this post, I provide an illustration of those mechanics. You can find some additional discussion on our main website.

Suppose that Mary, a single female, is turning 62. She will receive \$25,000 a year if she claims at that age. Over a normal life span, up to age 86, she will receive a total of \$625,000 (ignoring any COLAs).

A serious problem with this total amount is that it assumes that the \$25,000 received 25 years from now has the same value to Mary today as the \$25,000 she will get over the next year. Clearly, these two amounts don’t have the same present value: \$25,000 25 years from now is worth a lot less than \$25,000 received over the next 12 months.

The conventional method for translating future values into present value equivalents is to discount those future values by a discount rate (or discount factor). For our calculations, we use a 3% real discount rate (that is, 3% over and above any inflation).

So, the present value of \$25,000 to be received next year would be calculated as: \$25,000/1.03 = \$24,272. In other words, at a 3% discount rate, \$25,000 received next year is worth \$24,272 to you today.

From an investment perspective, discounting is the twin of compounding. If you could invest \$24,272 today at 3% (above inflation), you would have \$25,000 in one year (= \$24,272*1.03).

The calculations for the entire 25 year period used in this example are shown below:

The undiscounted annual benefits (\$25,000) are shown in the second column. The appropriate discount rate is shown in the third column. And the discounted amounts are shown in the last column.

Our measure of Social Security Wealth is the sum of the last column: \$448,389 in this instance. Compare that amount to the undiscounted amount of \$625,000. The discounted amount is about two-thirds of the undiscounted amount. (We have found this two-thirds relationship to be a fairly reliable rule of thumb in many instances.)

One useful way to think about the discounted total amount is as follows: \$448,389 invested at 3% above inflation will yield a time stream of annual payments of \$25,000, for a inflation-adjusted total of \$625,000 by year 25.

Now, you may wonder why we use a 3 percent discount rate. That is an issue for a future post.

T Rowe Price Social Security Benefit Calculator: A Broken Tool

T Rowe Price recently rolled out a new Social Security benefit calculator. Unfortunately, their calculator is not ready for prime time. In fact, in its current state, it is not ready for any time. It gives incomplete and misleading advice that, if followed, could cost some married couples \$100,000 or more.

I will illustrate some of the problems with the T. Rowe Price (TRP) Social Security calculator with data for a hypothetical married couple, John and Mary. I assume John and Mary were born in 1952 and 1954, respectively. John’s life expectancy is 83; Mary’s is 95. John’s Social Security benefit at his full retirement age (FRA) is \$2000 a month, while Mary’s is \$100 a month.

Example #1

For this example, I selected the following as this couple’s goal: “We want to maximize the survivor benefit and also receive income early, if possible.” (The TRP calculator allows a user to select among several goals.)

Here is the set of recommendations from the T. Rowe Price calculator:

1. Mary claims retirement benefits at 62, receiving approximately \$900 per year.
2. When John turns 66, he files a restricted application for spousal benefits, receiving approximately \$600 per year.
3. When John turns 70, he claims his own retirement benefits, receiving approximately \$31,680 per year.

And that’s it.

Do you see a problem here–a really big problem?

The T. Rowe Price Social Security calculator has failed to include a recommendation that Mary should claim a spousal supplement as soon as John turns 70. At that point, she could pick up an extra \$10,800 a year in spousal benefits. These spousal benefits would continue until John’s expected death at age 83, implying that the T. Rowe Price Social Security calculator has mislaid about \$140,000 in this case!

That’s an amazing–really, inexcusable–oversight.

Example #2

For this second example, I assume that Mary’s retirement benefit at her FRA is \$900 per month. Other personal characteristics remain unchanged.

For the couple’s goal, I assume that John plans to retire at age 66 and that Mary plans to retire at 70.

Here is what the TRP calculator recommends:

1. John should file for his retirement benefits at age 66, receiving approximately \$24,000 per year.
2. Mary should file for her retirement benefits at age 70, receiving approximately \$14,256 per year.

Again, that’s it.

And, again, I ask: do you see a really big problem here?

The TRP calculator fails to mention that Mary can claim spousal benefits at age 66, using a restricted application and letting her retirement benefits grow until age 70. These spousal benefits would equal \$12,000 a year, or \$48,000 between age 66 and 70 Mary.

I have not yet thoroughly investigated the TRP calculator. But, from what I have seen, it is easy to conclude that this calculator is seriously broken.

For an example of a calculator that actually works, go here.

How to Calculate the Social Security Supplemental Spouse Benefit

A client recently asked me: “Should I claim my modest Social Security retirement benefit early, say at 62, and then switch to my larger spousal benefit later on?” This question shows a serious misunderstanding of the relationship between retirement benefits and spousal benefits.

One can never switch from retirement benefits to spousal benefits. If a person is receiving retirement benefits (or they have filed and suspended receipt of those benefits), then the spousal benefit becomes a supplemental benefit, not a substitute benefit.  In other words, when a person is eligible for both retirement and spousal benefits, the Social Security Administration first calculates their retirement benefit, and then adds their spousal supplement. While this distinction may appear trivial, it can nevertheless have significant implications for Social Security claiming decisions, as I will show below.

Just to keep things reasonably simple, I limit the following discussion to those circumstances in which a person claims retirement benefits early and then claims spousal benefits at their full retirement age (FRA).  Note that if a person claims retirement benefits before FRA and they are eligible for spousal benefits at the time of claiming, then the SSA “deems” that both benefits are being claimed. So, the case I discuss here applies only to those who could not claim spousal benefits at the time they claim retirement benefits.  A person cannot claim spousal benefits unless their spouse has claimed his or her own retirement benefits. (This restriction does not apply to ex-spousal benefits, but that is a topic for another time.)

Let’s look at an example to see how this works. Consider a hypothetical couple: Karen and Burt, who are both 62. Karen’s retirement benefit at age 66, her full retirement age (FRA), is \$400 a month. Burt’s age 66 (his FRA) benefit is \$2,000. Karen’s maximum spousal benefit is \$1,000 at 66 (that is half of Burt’s age 66 retirement benefits). Burt plans to file for retirement benefits at 66, at which point Karen will be eligible to claim spousal benefits.

Karen knows that she can claim retirement benefits early at age 62 and get \$300/month (75% of the \$400 she could get at her FRA). She also believes that at her FRA she can switch to her spousal benefits and get \$1,000. She is wrong on this last count. By claiming spousal benefits at her FRA, she can get the full spousal supplement, but that will not bring her up to \$1,000.

Here is how the full spousal supplement is determined. It equals 1) a person’s maximum spousal benefit at their FRA (\$1,000 for Karen) minus 2) that person’s retirement benefit at FRA (\$400 for Karen). By claiming spousal benefits at her FRA, after claiming \$300 in retirement benefits at 62, she gets a full spousal supplement of \$600 (= \$1,000 – \$400). This brings her total benefit, at FRA, up to \$900, not the \$1,000 she was expecting.

Claiming retirement benefits early results in a significant reduction in those benefits. Karen thought she could claim retirement benefits early and then dodge that penalty by “switching” to spousal benefits. But, that is simply not possible, as the above example demonstrates. The early retirement penalty will stick with Karen until she dies (or until she switches to widow’s benefits— a topic for another post).

A final point: just as early claiming of retirement benefits is penalized, so is early claiming of a spousal supplement.  But, just to add to the complexity, the SSA uses different early claiming penalties for the two benefits.

Presidential Debate: Romney and Obama on Social Security

During the first Presidential Debate the two candidates were directly asked to address the issue of Social Security.  Here is what they said:

LEHRER: All right? All right. This is segment three, the economy. Entitlements. First — first answer goes to you, two minutes, Mr. President. Do you see a major difference between the two of you on Social Security?

OBAMA: You know, I suspect that, on Social Security, we’ve got a somewhat similar position. Social Security is structurally sound. It’s going to have to be tweaked the way it was by Ronald Reagan and Speaker — Democratic Speaker Tip O’Neill. But it is — the basic structure is sound.

….(digression on Medicare)…..

When it comes to Social Security, as I said, you don’t need a major structural change in order to make sure that Social Security is there for the future.

LEHRER: We’ll follow up on this.

First, Governor Romney, you have two minutes on Social Security and entitlements.

ROMNEY: Well, Jim, our seniors depend on these programs, and I know anytime we talk about entitlements, people become concerned that something’s going to happen that’s going to change their life for the worse.

And the answer is neither the president nor I are proposing any changes for any current retirees or near retirees, either to Social Security or Medicare. So if you’re 60 or around 60 or older, you don’t need to listen any further.

But for younger people, we need to talk about what changes are going to be occurring. Oh, I just thought about one. And that is, in fact, I was wrong when I said the president isn’t proposing any changes for current retirees. In fact he is on Medicare. On Social Security he’s not.

What can we learn from this exchange?

First, Social Security is not the problem that Medicare is.   While Social Security is underfunded, it can be fixed whereas there is much less agreement on how to fix Medicare.

Secondly, neither candidate is anxious to say that they will lower benefits for people who are 60 or older.  This constituency votes is large numbers, and politicians are loath to change the Social Security benefit structure in a way that will affect them adversely.  This does not mean that younger people will be so lucky.   As we have pointed out in an earlier post, http://www.socialsecuritychoices.com/blog/?p=93, Orszag and Diamond have analyzed the Romney proposals and have calculated that, because Romney’s proposal does not raise taxes, benefits would fall significantly for today’s young people.

“That’s exactly what’s going to happen,” Senator Bernie Sanders (Ind – Vt) said of Social Security being on the proverbial table, “Unless someone of us stops it — and a number of us are working very hard on this — that’s exactly what will happen. Everything being equal, unless we stop it, what will happen is there will be a quote-unquote grand bargain after the election in which the White House, some Democrats will sit down with Republicans, they will move to a chained CPI.”

Chained CPI, or consumer price index, is an alternative measure of calculating inflation that would lessen the cost of living increases for Social Security payments. When the president and Speaker John Boehner (R-Ohio) attempted to craft a deal on the debt ceiling last summer, Obama offered the chained CPI as a concession.

Sanders is one of 29 Senators who have signed a letter to “oppose including Social Security cuts for future or current beneficiaries in any deficit reduction package.” In addition Sanders has supported legislation that would enact the proposal that Obama put forward as a candidate for president in 2008, which entails putting in place a payroll tax on income over \$250,000, in the process creating a gap between the current cap of \$110,100 and that new level.

Obama’s openness to the tax proposal at the AARP forum prompted Sanders to call The Huffington Post to try and get the president’s commitment to that approach.

“When he says that he’s willing to look at changing the cap, that’s not good enough,” said Sanders. “Four years ago, he told us that, in fact, that was a proper solution, and he was right. I’ve introduced legislation to do just that … I think we’ve got to make sure that we reduce the wiggle room for the president, and he has got to make a very simple statement that, ‘If reelected, I will not cut Social Security.'”

By Monday morning, the Obama campaign had moved slightly in the opposite direction, with top adviser David Axelrod refusing to unveil any specifics about what the president had planned for Social Security reform.

“[T]he approach has to be a balanced one,” Axelrod told MSNBC’s “Morning Joe.” “We’ve had discussions in the past. And the question is, can you raise the cap some? Right now Social Security cuts off at a lower point. Can you raise the cap so people in the upper incomes are paying a little more into the program? And do you adjust the growth of the program? That’s a discussion worth having. But again, we have to approach it in a balanced way. We’re not going to cut our way to prosperity. We’re not going to cut our way to more secure entitlement programs — Social Security and Medicare. We have to have a balance.”

“So what is the president’s proposal?”, asked Time magazine’s Mark Halperin.

“Mark, I’ll tell you what: When you get elected to the United States Senate and sit at that table — this is not the time,” replied Axelrod.

How Do I Maximize My Social Security Benefits?

There are two answers to the question expressed in the title.

First, if you are interested in maximizing your monthly Social Security retirement benefits, all you need to do is wait until age 70 to claim your benefits.  If you are looking to maximize your monthly spousal benefits, then you should wait until your full retirement age to claim them.  (Spouse benefits include ex-spouse and surviving spouse benefits.)

Second, if you are seeking to maximize your lifetime Social Security retirement or spouse benefits, then answering this question can be vastly more complicated than answering the first one.

Let’s consider married couples, the group that faces the most difficulty in finding the claiming strategy that maximizes lifetime Social Security benefits: they face literally hundreds of possible claiming options. At www.SocialSecurityChoices.com  we have found the following factors to be the principal underlying determinants of optimal claiming strategies for married couples:

1. Length of planning horizon (e.g., do you and your spouse have a relatively short life expectancy because of poor health; or, do you expect to live well into your 80s or even 90s?);
2. The discount rate for converting future values into present value equivalents (for the details about this factor, see our discussion on the main website).
3. The ratio of the wife’s primary insurance amount, or PIA (that is, retirement benefit at full retirement age) to the husband’s PIA;
4. The age differences between the husband and wife.

For ex-spouses and widow(er)s, determinants (3) and (4) above are irrelevant because only one spouse is directly involved in claiming decisions for this group.  The optimal claiming determinants for these two groups include (1) and (2) from above, plus (3′)

3’.  The ratio of the person’s PIA to their maximum ex-spouse or widow(er)’s  benefit.

For singles, the problem is much simpler in that the optimal choice depends only on factors (1) and (2) above.

If you need help in solving your claiming puzzle, check out our separate benefit calculators for married couples, singles, and widow(er)s. (The calculator for ex-spouses is under development and should be available soon.)

A Misleading Tool: Social Security Break-Even Calculator

Those thinking about whether to claim their Social Security benefits now or later often ask the following question: “If I delay claiming and give up benefits now in return for greater benefits later on, how many years must I wait to get those forgone benefits back? This is known as the “Social Security breakeven time period” question.

In this post, I discuss why concentrating on this breakeven question alone may well lead to poor decisions about one’s claiming strategy. Notably, the Social Security Administration agrees with my view. For some years, the SSA website had a Social Security break-even time-period calculator. It was removed about three years ago because the SSA concluded the information generated by the calculator was misleading many people into making poor claiming decisions.

Here is a simple example of how a Social Security breakeven calculator works. Suppose that Don, a single person, could get \$9,000 a year in Social Security benefits if he took them at age 62. If he waited one year, his benefits would go up to \$9,600. So, he gives up \$9,000 for a year in order to get an extra \$600 a year for the rest of his life. The breakeven period for Don is 15 years (= \$9,000/\$600), or when he reaches age 77. Had I discounted future benefits to account for the time value of money, the breakeven age could be several years past age 77.

Delayed claiming is a form of investment: you give up money today in return for more money in the future. Wise investors consider at least three factors when contemplating an investment: 1) how risky is the investment? 2) what is the expected rate of return on the investment? and 3) how liquid is the investment? Breakeven time-period analysis focuses exclusively on the third question: when will I get my money back?

When confronted with a payback time period of 15 to 20 years, many people decide that is too long to wait to get their “investment” back. So, they claim as early as possible. Yet, by ignoring the implied rate of return to delayed claiming, such decisions are usually poorly informed. On our main website,we show that delayed claiming can offer high rates of return, even extraordinarily high rates of return in some circumstances. And these rates of return are inflation protected. A breakeven calculator tells you nothing about this important factor.

Breakeven analysis also says nothing about risk. Delayed claiming essentially provides a risk-free payoff in the form of inflation-protected higher future benefits. The only investments that approach this extremely low level of risk are federally insured forms of savings, like bank CDs.

In this era of low interest rates, it seems impossible to beat delayed claiming as an investment, unless perhaps you want to assume a lot of risk. Of course, the problem with high risk investments is that you might lose everything you invested.

If you are interested in maximizing your Social Security benefits, you should investigate our Social Security calculator, which provides step-by-step guidance as to how to get the most out of Social Security.

Falling Short: The AARP Social Security Benefits Calculator

The AARP Social Security benefit calculator was introduced to much fanfare in July 2011. While the AARP calculator is free and easy to use, it is not as helpful as it first appears, especially for married couples.

According to the AARP, their Social Security benefits calculator “…will show you why most people should wait as long as possible to claim Social Security — and why a few people should claim earlier” (emphasis added), In fact, their calculator does no such thing.

The AARP calculator shows what nearly everyone knows: if you delay claiming your retirement benefits, you can get a higher monthly benefit up to age 70. It offers no explanation as to why most people should want to do this. It simply assumes people want the highest monthly benefit possible, and then it proceeds to show people how to get those benefits. There is nothing new or insightful here. AARP’s suggestion:: just wait until you are age 70 and then claim retirement benefits. (To be fair, the AARP calculator often recommends a special strategy for married couples–like file and suspend –that yields some extra money before the couple turns 70.)   Notably, only about 4% of Social Security claimants wait past their full retirement age to claim benefits. So, the AARP presumption that a married couple will have a serious interest in what they could collect if they both claimed at 70 seems unrealistic.

If a person has another objective in mind, the AARP calculator will likely not help them achieve it. For example, suppose a married couple is interested in maximizing expected lifetime Social Security benefits, discounted to today’s dollars. The AARP calculator won’t help them achieve that goal.  In fact, it will likely seriously mislead them if this is their objective.

To illustrate, consider a husband (H) with benefits at full retirement age (FRA) equal to \$2,000 a month and a wife (W) with benefits at FRA equal to \$1,900 a month. H is presently 61; W is 58. The AARP calculator advises H to file and suspend his retirement benefits at 69 so that W can claim spousal benefits of \$1,000 a month for four years. Then, at age 70, H starts his retirement benefits, which have grown to \$2,640 a month. Finally, when W reaches 70 she switches to her own retirement and gets \$2,508 a month.

While the above claiming strategy maximizes monthly benefits starting at age 70 for both H and W, it does not maximize their expected lifetime benefits. Our calculator shows that the couple would maximize expected lifetime benefits by having W claim retirement at age 62, allowing H to claim spousal at age 66 and then his own retirement at age 70.  Compared to the AARP strategy, this claiming strategy gets the couple about an extra \$35,000 in lifetime benefits (in present value terms), even though it does not maximize the couple’s monthly benefits. The money they gain during their 60s more than offsets what they give up as a result of lower monthly benefits in their 70s and beyond.

What is more, even if you accept the goal of the AARP calculator, it still can seriously mislead and cost you money. To illustrate, consider another example. H and W are both 61. H’s benefit at FRA is \$2,400 a month; W’s is \$900. The AARP calculator recommends that H file  and suspend at age 66 so that W can start collecting spousal benefits of \$1,200 a month (adding up to a total of \$57,600 by the time she reaches 70). When they both reach 70, H will be getting \$3,168 a month and W continues with the \$1,200 a month in spousal benefits.

Our Social Security calculator recommends another strategy that will yield more money but achieve the same end. It suggests that W claim retirement of \$900 at age 66, allowing H to claim spousal of \$450 at age 66. So, they get \$1350 a month for four years, for a total of \$64,800, or \$7,200 more than provided by AARP’s recommendation. When they both reach 70, H claims his retirement benefits of \$3’168 a month and W switches to spousal of \$1,200 a month. In other words, once they reach 70 their monthly benefits are the same as under the AARP recommendation, but they have pocketed an extra \$7,200.

To summarize: married seniors looking for serious guidance with respect to their claiming decisions are unlikely to get it from the AARP calculator.

Married and Turning 66? Time to Consider Your Social Security Claiming Options

Many people who are still working at age 66 have not looked into their options for claiming Social Security benefits. They simply plan to claim their benefits when they eventually retire or even wait until 70.

Delayed claiming is generally a good idea because it means that you will get a larger retirement benefit, but there are important advantages for many married couples if one spouse claims spousal benefits at 66 and then claims their own benefit later. So it is important to develop a Social Security claiming strategy, especially as the younger spouse nears age 66.

Here is an example. Suppose the husband is one year older than his wife. They both are working and they plan to continue working for some time. The husband’s Social Security Statement shows that he would receive a retirement benefit of \$2000 if he had taken his benefit at 66, his full retirement age. The wife’s benefit at age 66, as shown on her statement, would be \$1500. The wife has just reached 66. Because she has reached full retirement age, she can file a restricted application for a spousal benefit now, and then claim her own retirement benefit later. If she does this, she will receive a spousal benefit of half her husband’s retirement benefit, or \$1000 per month. Then she can wait and claim her own benefit, which has grown by 32% at age 70. So at 70 she will start to receive \$1980. In effect,she is being subsidized with the spousal benefit to wait for the larger retirement benefit.

If she does not claim the spousal benefit at 66 and simply waits until 70 to receive her own benefit she will lose \$1000 per month or \$48,000 in benefits over four years and her benefit at 70 will be the same as it would have been if she had just waited.

For a more complete explanation of these strategies, see our discussion of “file and suspend” and “free spousal.” We can also help you develop an optimal claiming strategy with our Social Security benefits calculator.