Monthly Archives: April 2012

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.

Nonsense Watch: Misinformation about Social Security is Rampant

A recent AARP survey makes clear that the public is unaware of many important aspects of the Social Security system. There are resources available to help individuals with their Social Security claiming decision, such as our custom reports, but the information deficit is not helped by errors made in news stories intended for public consumption.

On this blog, I’ll keep an eye out for stories that misrepresent the Social Security system or make assertions that are be unclear or misleading. I am certainly not implying that these writers are purposefully misleading their readers – they have no incentive to do so. Instead, I’m hoping to make the point that oversimplification often leads to misunderstanding and has the potential to lead people to making costly errors. The rules surrounding Social Security benefits are complex. One simply cannot say what needs to be said in a few bullet points.

CNBC recently published a slide show on ten things you must know about Social Security. Shortly after, published a summary of the slide show. In both stories, there were a number of errors and misleading statements. These errors are more prevalent in the in the InvestorPlace piece, so we’ll examine that below.

3. Start later for bigger benefits. You can claim benefits as early as 62, but if you wait until 65, you will get higher benefits. Waiting even a single year beyond 62 will increase what you get.
4. Waiting past 65. If you can delay claiming benefits until after 65, you will get even more money, up to 8% more annually.

For some reason, both CNBC and InvestorPlace viewed 65 as a watershed year. Since 2002, age 65 has had no significance with respect to Social Security benefits (2002 is the last time age 65 was the full retirement age). Even full retirement age is fairly arbitrary in terms of individual benefits. Delaying benefits past age 62 results in benefit increases to full retirement age and beyond, up until age 70. Full retirement age has important implications for married couples (see file and suspend and free spousal/restricted application) and widows, but in the context of individual benefits it is meaningless.

5. There’s a benefit ceiling. No matter how long you wait, the maximum monthly payment is currently $2,513 per month.

There is a benefit ceiling, but it’s not $2,513. This number is listed by the SSA as the maximum benefit available to individuals claiming at full retirement age (66) in 2012. Individuals who waited to claim until 70 and are claiming now may be entitled to larger monthly benefits than $2,513. My back of the envelope calculations suggest that the largest possible monthly SS check is currently $3,161, based on the maximum full retirement age benefit in 2008 ($2,185) increased by 32% due to delaying retirement and cost of living adjustments between 2008 and today.

9. Marriage has benefits. You can collect half of your spouse’s benefits, if higher than yours, even if you wouldn’t qualify for that level based on your own lifetime earnings.

To CNBC’s credit, they say a little bit more about this issue than InvestorPlace, although they too leave out any mention of the file and suspend strategy and restrictions on spousal benefits. The sentence above from InvestorPlace doesn’t even scratch the surface of the options available to married couples. What’s worse, it suggests that spousal benefits are always half of the spouse’s benefit, and that spousal benefits are unavailable to those with a higher base benefit, both of which are incorrect.

The fact of the matter is that a prudent individual should be devoting a considerable amount of time to building up an understanding of Social Security before they decide to claim benefits. Stories such as these imply that the Social Security claiming decision is a simple one and that little thought is necessary.  In reality, there are numerous paths an individual can take (hundreds for married couples) and the difference between the best and the worst is often over $100,000 in lifetime benefits. We are committed to helping people find the right path, which is why we offer a great deal of free Social Security information as well as custom reports tailored to your individual situation.



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.


Relationship between Wages and Social Security Benefits

To generate our custom reports, we ask our customers to provide the benefit available to them at their full retirement age, or their primary insurance amount (PIA). All of our calculations are done based on that number, but we don’t discuss how SSA determines it. It’s fairly common knowledge that someone with higher wages over their lifetime will have a larger benefit than someone with lower wages. However, the details of the calculation are little known.

One’s PIA is based on the highest earning 35 years. If a beneficiary did not earn wages for a full 35 years, zeros are used for the remaining years. Earnings are adjusted for wage growth so that they are comparable across time. They are also capped at a certain level ($110,100 for 2012), beyond which additional wages are not subject to the Social Security portion of the FICA tax and do not contribute to one’s benefit. Using these adjusted, capped earnings, an average monthly wage is calculated. This average monthly wage forms the basis of the PIA.

The PIA increases as the average monthly wage increases, but the increase is not linear. Each dollar in the average monthly wage contributes positively to the PIA, however, the first dollars contribute more than the later dollars. For individuals turning 62 in 2012, the PIA is equal to the sum of the following:

  • 90% of the first $767 in the average monthly wage,
  • 32% of the average monthly wage between $767 and $4624, and
  • 15% of the average monthly wage above $4624.

The maximum possible average monthly wage for those turning 62 in 2012 is $8199, and the maximum possible PIA, based on the calculation above, is $2460. The chart below shows the PIA under different proportions of the maximum possible average monthly wage. For example, an individual with an average monthly wage that is half of the maximum has a PIA of approximately $1760, over 70% of the maximum possible PIA.  Someone with an average monthly wage that is a quarter of the maximum has a PIA of about $1100, about 44% of the maximum possible PIA.

PIA vs Average Monthly Wage


Fortunately, the Social Security Administration does this calculation for you, but it’s interesting to see how the calculation is consistent with the notion that Social Security is in place to provide a minimum standard of living to those in retirement.

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.