Category Archives: Optimal Claiming Strategies

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.

Social Security Benefits for Ex-Spouses Better than for Spouses

A little known fact is that Social Security offers ex-spouses two valuable benefit claiming options not available to spouses. These advantages can be worth thousands of dollars to a person who meets Social Security’s definition of a divorced person eligible for ex-spouse benefits.

To illustrate these advantages, we’ll consider a simple example. Suppose Burt is married to Karen. Previously, he was married to Doris who has not remarried. All of them will be turning 62 soon. Burt’s benefit at his full retirement age (FRA) of 66 is $2,000 a month. Karen and Doris happen to have the same retirement benefits at their FRAs, namely, $400 a month. Burt plans to claim his retirement benefits when he turns 66. Let’s turn now to the advantages offered divorced persons.

First, Karen (the spouse) cannot claim spouse benefits on Burt’s record until he claims his own benefit at 66. In contrast, Doris (the ex-spouse) can claim ex-spouse benefits as early as age 62, even though Burt has not claimed retirement benefits. Suppose both Karen and Doris claim their own retirement benefits at age 62, receiving reduced retirement benefits of $300 a month (75% of their FRA amount). In addition Doris can claim early spousal benefits. If she had no benefits of her own, the spousal benefit would equal $700 a month (70% of $1,000). But she has $300 a month in retirement benefits, so she gets only $420 a month in ex-spouse benefits. Doris, the ex-spouse, gets an extra $5,040 a year for 4 years (or a total of $20,160), that is not available to Karen.

Second, since Karen is currently married she cannot claim spousal benefits on the earnings record of any previous ex-husband. In contrast, Doris–who has not remarried–can pick and choose among previous husbands, provided she was married for 10 years or more to each one. For example, suppose Doris was previously married to John for 12 years. John’s retirement benefit at his full retirement age is $2400. In this case, Doris should claim spouse benefits on John’s earnings record, since Burt’s full retirement amount is only $2,000. If she claims spouse benefits at age 62 on John’s record, she would get $860 a month in benefits (retirement and spousal combined).

This favorable financial treatment of ex-spouses, relative to spouses, has a surprising unintended consequence. It sets up an incentive for some couples to divorce so that they can take advantage of that favorable treatment. The SSA is not oblivious to this situation. It requires that a person be divorced for at least two years before he or she can qualify for ex-spousal benefits.

You can learn more about benefits for ex-spouses by checking out the divorced-persons page on our main website.


A Tale of Two Social Security Strategies: File and Suspend versus Restricted Application

When at least one spouse reaches full retirement age (presently 66), two potentially valuable Social Security claiming options become available: 1) the file and suspend  option, and 2) the restricted application (or free spousal) option. The former gets far more publicity, and is better known, than the latter option. But, we find good reason to believe that the media emphasis is misplaced. For optimal Social Security claiming strategies, the restricted application option appears much more important. More on this in a moment.

First, let’s illustrate these options. Consider a married couple, Ted and Nancy. Ted is 66, his full retirement age (FRA). Nancy is 64. Under the file and suspend option, Ted files for Social Security retirement benefits and then immediately suspends receipt of them so that Mary can claim spousal benefits while his benefits continue to grow through delayed retirement credits.

Under the restricted application (or free spousal) option, Ted claims spousal benefits on Nancy’s record, assuming she is already receiving retirement benefits. Since he has reached his FRA, he does not need to claim his own retirement benefits. They can continue to grow to age 70.

Now to our main point. Our custom reports for clients identify the optimal strategies for maximizing the present value of a married couple’s Social Security benefits. We examined a small sample of 40 reports to see how often these two options played a role in the optimal strategy. Here is a summary of the results for two-earner couples with normal life expectancies.

Graph of Optimal Strategy Occurance

Another way to put it is: file and suspend is recommended in 27.5% (= 10% + 17.5%) of the reports, while restricted application (or free spousal) is recommended in 75.0% (= 57.5% + 17.5%) of them. This huge difference favoring the restricted application option surprised us, given the media emphasis on file and suspend.

The take-away: don’t simply assume that the file and suspend strategy is best for you and your spouse. Odds are it is not.

To find out whether file and suspend, or some other option, is best for you and your spouse, you can order a custom report.